FHFA Approval of VantageScore 4.0 May Unlock Opportunities for Millions of Thin-File Borrowers

The lending industry was given a jolt recently when Federal Housing Finance Agency Director William J. Pulte tweeted on X that Fannie Mae and Freddie Mac lenders may begin using VantageScore 4.0.

While lenders will still use the tri-merge format — pulling credit reports from all three major credit bureaus — approval puts an end to decades of exclusive use of FICO scores on loans supported by government-sponsored enterprises (GSEs).

The move could cause ripples in the credit-scoring market. Conventionally, Fair Isaac Corporation’s FICO score has been the key to GSE mortgage approvals. That old relationship came with licensing costs, which have been considered by many in the lending community to be too costly.

Public comments by Pulte referred to a desire to encourage competition and reduce those costs to what he called President Trump’s “landslide mandate” of reducing financial red tape.

The shift has the potential to democratize access to home mortgages. VantageScore 4.0, jointly developed by Equifax, Experian, and TransUnion, is widely regarded as more inclusive.

It employs different data and newer modeling techniques, and by consequence, frequently produces a score for consumers with limited traditional credit history — often referred to as “thin-file” borrowers. A great number of young applicants, new immigrants, and people residing in underserved neighborhoods fall into this category.

Lowering Barriers, Lowering Costs

One of the direct advantages of the FHFA decision is a potential lower cost of doing business. VantageScore’s licensing arrangement is generally viewed as a more lender-friendly approach than FICO’s.

While comprehensive pricing details are proprietary, Pulte’s announcement directly addresses what he called FICO’s long-standing market domination’s “high costs.”

Lower credit reporting costs could mean that lenders save money on every loan that is originated. For large lenders with high monthly loan volume, the combined impact could amount to millions annually. Whether those savings trickle down to consumers as lower fees or better rates remains to be seen.

Thin-File Borrowers Have Much to Gain

These borrowers can find it hard to create a FICO score if their credit activity has been minimal and infrequent, possibly with no credit or installment loans in a few years. VantageScore’s more recent model, by contrast, works with a larger data window and incorporates rent and utility payments.

This change may benefit first-time buyers, minority borrowers, and lower-income applicants — groups that are particularly found among thin-file borrowers. A system that can accept a wider spectrum of credit use can issue more approvals while not easing underwriting standards.

VantageScore usage in mortgage originations surged 166% in 2024. This surge was offset by a withdrawal by Fannie Mae and Freddie Mac, which had not previously used the score. A comeback now appears inevitable, with the GSEs on board.

Adoption Without Disruption

One area that typically complicates tech-related transitions is infrastructure. In this case, that won’t be an issue. The FHFA confirmed that lenders can integrate VantageScore 4.0 without abandoning the tri-merge system, which collects reports from all three credit reporting agencies.

This compatibility also suggests that no radical restructuring of IT is required, removing a key adoption obstacle. Lenders interested in piloting the new model can do so with minimal friction.

The new VantageScore model can be onboarded into mortgage lending processes without much friction thanks to its compatible makeup.

That’s important because mortgage lenders have small margins and don’t like changes that would make compliance harder or clog application pipes. This plug-and-play deployment would accelerate adoption in a manner that previous credit model pitches could not.

Competitive Pressures Mount

The announcement is more than a symbolic move for FICO, however — it could cause financial pain. Fair Isaac Corporation shares dropped by over 10% after FHFA’s announcement.

While VantageScore’s market share is growing — 41.7 billion of its scores were used in 2024, for example, compared with 26.9 billion in 2023 — FICO has had a tight grip on the mortgage market for a very long time. That was a major revenue and influence stream. Competition now has a way in.

Lenders would also profit in the long term by using multiple scoring models to more effectively triangulate risk on borrowers. The effort could also drive innovation, as FICO and VantageScore make changes to their formulas to achieve more predictive power and greater consumer inclusiveness.

The Fintech and Subprime Lender Watchpoint

This policy shift could have applications beyond conventional mortgage lenders. Fintechs and nonbank lenders focused on underserved borrowers could gain real traction by building partnerships that center on home loans.

If VantageScore increases eligible lending to lower- and moderate-earning borrowers, downstream products like credit-building products and payment tracking systems could see broader use as well.

The move by FHFA could force financial institutions to look more extensively at risk assessment, especially for nonprime consumers who may not fit standard molds but display healthy payment habits in real life.

The bigger question is whether lenders will adopt it broadly — and how soon. That timeline may ultimately define how much impact this initiative has on loan access and the homeownership gap.