A lender that funds Department of Veterans Affairs-guaranteed mortgages is now pioneering the use of an advanced
Cardinal Financial, the 33rd largest VA lender in January, is reportedly the first public user of FICO 10-T for this purpose. FICO 10-T is
While the VA does not have a specific credit score requirement, instead relying on other measures of consumers' ability-to-repay to manage risk, mortgage lenders often supplement their individual underwriting with other measures like the traditional FICO score.
The traditional FICO score most lenders use as a cutoff for this type of loan, absent a down payment, is 620, according to the department. Use of an alternative score could broaden the credit box for VA loans.
Cardinal's use of FICO 10-T comes at a time when broader adoption of advanced scores are pending in the larger Fannie and Freddie market. In part, that's a result of lender concerns about the price of credit measures and the need to potentially pay for more than one score. There's also generally more interest in testing new metrics.
"As people are waiting for the 60% of volume that goes through Fannie and Freddie, there is this other 40% of volume that's out there," said Joe Zeibert, vice president of mortgage and capital markets at FICO.
Other reported uses of 10-T outside the Fannie and Freddie market have included nonbank originations of loans made outside the ability-to-repay rule's qualified-mortgage definition, some of which have a securitization execution. More recently banks
"We had the first bank signup, now we have a VA securitization and we're trying to talk to all of the parts of the market that are able to use 10-T today because it does help customers and lenders," Zeibert said.
Banks may be more familiar with advanced credit scores because they have been used more commonly to size up some other types of consumer loans. They're less often used in conjunction with mortgages because Freddie and Fannie have been underwriting loans they accept with classic FICO.
Vantagescore 4.0, the other advanced credit metric Fannie and Freddie will be adopting, also recently has seen expanded use.
When asked about whether the Federal Housing Administration would consider using any of the advanced scores recently, a Department of Housing and Urban Development spokesperson said in a emailed statement that it's been gathering information about the credit metrics.
"We are currently conducting analysis to evaluate the potential impact of alternative credit scoring methodologies on borrowers seeking FHA-insured mortgages. The results of that analysis will be used to assess our next steps regarding this issue," the department's spokesperson wrote.
While it may be possible to use a single metric with the advanced scores, some circumstances could require them to be coupled with traditional measures.
When it comes to securitizations of Cardinal's VA loans, this may depend on whether investors are comfortable that the scores offer value in line with the underwriting and performance improvements providers promote.
"It's possible that when they do the securitization, they might put both scores on there just so that investors that only want Classic can see them, but they are going to be decisioning off of 10-T," Zeibert said, noting that Cardinal may use the advanced score for private loans as well.
