These days, pretty much all banks and mortgage lenders use FICO scores to determine your creditworthiness before approving you for a mortgage.
It’s one of the most important steps a mortgage lender will take to determine eligibility. But one mortgage disruptor, SoFi, is declaring a “FICO-free zone.”
Yup, they’re done with FICO, and apparently don’t need it to make credit decisions moving forward.
When the recent housing crisis took hold, FICO wasn’t exempt from blame, as it appeared credit scores were relied on too heavily. In fact, the now infamous no doc loan was only possible with overreliance on credit scores.
After all, it’s the only thing the lender could look at, aside from the property itself. We all know how that turned out…
FICO Doesn’t Tell the Whole Story?
SoFi took a shot at FICO on their blog this morning, noting that “a growing number of lenders” don’t seem to think FICO scores tell the whole story, and in some cases can even be “misleading.”
I’m sure tons of consumers would agree with that, having been “wronged” by FICO and other credit score providers over the years for seemingly small missteps. Or no missteps at all…
The author of the post, Dan Macklin, ponders whether FICO scores are going the way of phone booths. Ironically, he’s from England where the ubiquitous red phone booth seems to be a mainstay.
Anyway, he explains why SoFi is ditching FICO scores, using his own plight to highlight the many flaws found in traditional credit scoring models.
Macklin moved to the United States with 15 years of credit history under his belt but it counted for squat when he arrived Stateside.
Instead, he was forced to open credit cards and other loans he didn’t need to build a credit history, a key ingredient to FICO scoring (or any other credit score).
To him, it’s counterintuitive seeing that such actions can actually sink your credit score if you get in over your head with debt. He also mentions that Millennials aren’t into credit cards, which could make it more difficult to build a traditional credit history.
In his eyes, FICO scoring also ignores things like savings, cash flow, future earnings, and the ability to pay other bills that don’t show up on a credit report, such as monthly utilities.
That’s debatable, seeing that those who have the ability to pay off their balances generally do. And those who don’t may not be as financially fit.
In any case, because of these “gaps” the company has decided to not use FICO scores when evaluating applicants.
More Holistic View
Instead, SoFi will focus more on employment history (and future earnings) and monthly cash flow less expenses.
Of course, they’ll still want to know you’re making good on your obligations, but they’ll do so without a three-digit score. They’ll dig in and try to determine your “financial wellbeing.”
I’m not exactly sure how they’re going to do that, but the message isn’t to worry less about your finances. It’s the exact opposite.
Macklin predicts a future with more sophisticated algorithms that go beyond that three-digit score, which could actually be more difficult to game. Because let’s be honest, it’s not that hard to manipulate the FICO score by doing a few simple things like paying off debts.
He thinks more lenders will forego FICO, just as colleges across the country have placed less importance on SAT scores. And apparently that will be good for everyone.
It’s unclear if SoFi will still have any credit score tiers or what data they’ll pull to eyeball your credit history before doling out a mortgage.
I’m also curious if they’ll have short sale and foreclosure waiting periods similar to most other mortgage lenders.
The good news is this could provide a new avenue for those who generally eschew credit but still need a mortgage to buy a home.
In related news, legislators are working to allow other competitors into the credit scoring space, including newer players such as VantageScore. After all this time, it appears FICO’s veritable monopoly might be coming to an end.
Source: thetruthaboutmortgage.com