Stock in Fair Isaac (FICO) — better known as FICO — is down more than 13% after two federal agencies announced Wednesday that mortgage giants Fannie Mae and Freddie Mac and the Federal Housing Administration will accept alternative credit scores for mortgage loans.
The move, which has been in the works for some time, is designed to loosen FICO’s dominance in credit scoring for mortgage underwriting, in turn lowering costs for consumers.
Fannie and Freddie, which support about 70% of the US mortgage market, will immediately accept an FICO alternative known as VantageScore 4.0, along with an updated FICO scoring model called the 10T, Federal Housing Finance Agency Director Bill Pulte and Housing and Urban Development Secretary Bill Turner said on Wednesday. HUD, which insures FHA loans, will accept them soon. FHA loans, used by many first-time homebuyers, are backed by the government and require lower credit scores and down payments to qualify compared with conventional offerings.
Read more: 6 benefits of a good credit score
Credit scores are a key factor in determining if a prospective homeowner qualifies for a mortgage and what interest rate they’ll pay. It usually takes a credit score of at least 620 to qualify for the most common type of loan, known as a conventional mortgage. It takes a significantly higher score, often 750 or above, to receive the lowest interest rates.
Both FICO and VantageScore 4.0 incorporate alternative data, like rental payment history, to help determine creditworthiness.
Pulte has repeatedly criticized FICO and the rising cost of credit pulls over the years. FICO shares are down by nearly 50% this year, making them the biggest loser in the S&P 500 (^GSPC).
Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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