Financing Commercial Real Estate – Newer Credit Scoring Models

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FICO 10 T and Vantage Score 4.0 are the newest versions of credit scoring models, aiming to provide a more comprehensive and accurate assessment of consumer credit risk.

Here’s a breakdown of each model:

FICO 10 T

• Released: In 2020, FICO.
• Key Feature: Incorporates “trended data,” analyzing credit behavior over time (24+ months) rather than a single snapshot, according to Lending Club.
• Impact: Lenders using FICO 10 T can potentially make more informed decisions, leading to a wider choice of lenders, increased loan approval chances, and more favorable loan terms for some borrowers.
• Focus: Emphasizes how consumers manage their credit lines and pay off debt, with increased weight given to timely payments and credit utilization.
• Availability: Currently available to lenders. The FHFA announced in October 2022 that Fannie Mae and Freddie Mac would transition away from the Classic FICO model and approve FICO 10T and Vantage Score 4.0.

Vantage Score 4.0

• Released: In 2017.
• Key Feature: Leverages machine learning and incorporates trended data to evaluate credit behavior over time, according to Chase Bank.
• Impact: Offers enhanced predictive performance for lenders and aims to increase financial inclusion by scoring approximately 33 million more consumers than conventional models, including many with limited credit histories.
• Focus: Emphasizes payment history, depth of credit, and credit utilization, with a score range of 300-850.
• Availability: Fannie Mae and Freddie Mac now accept VantageScore 4.0 for mortgage underwriting. Lenders can use it alongside or instead of Classic FICO scores, according to KTLA.

Key differences and impact

• Data Usage: While both models incorporate trended data, FICO 10 T looks specifically at the past 24 months or more of credit limits and balances. Vantage Score 4.0 utilizes trended credit data more broadly, reflecting changes in credit behaviors over time.
• Predictive Power: FICO states that FICO 10 T outperforms Vantage Score 4.0 in mortgage origination predictive power, according to Yahoo Finance. However, Vantage Score claims that Vantage Score 4.0 delivers a significant predictive lift over Classic FICO, according to VantageScore.
• Target Audience: Vantage Score 4.0 specifically aims to score more consumers with limited credit histories through the use of machine learning, potentially benefiting those historically overlooked by traditional models.
• Mortgage Lending: The FHFA mandated the use of Vantage Score 4.0 for Fannie Mae and Freddie Mac guaranteed mortgages, which is expected to expand the mortgage market by up to $1 trillion and help millions qualify for homeownership, according to Vantage Score. FICO 10 T is also expected to be available for use in mortgage lending in the future.

Important Note: The adoption of these new models by lenders may vary in pace, as each lender decides which scoring system it will use.