Renters who pay their landlords on time may start finding it easier to get a mortgage.
Last weekend, federally-backed home loan investor Fannie Mae introduced a tool that allows lenders to assess if renters pay on-time and to use that information to help them qualify for a mortgage. The move is designed to help more people with limited credit histories or low credit scores become homeowners.
Here’s how it works: After you apply for a mortgage the lender runs it through Fannie Mae’s underwriting software to determine if Fannie Mae would buy the loan. (Most lenders will not make a loan Fannie Mae or Freddie Mac, its counterpart, won’t buy.) Now, if the answer is no based on traditional inputs like credit score, renters get another shot.
At this point, the lender will ask for permission to search your bank statements. An automated system will then scan for records of 12 consecutive months of on-time rental payments. Fannie Mae says its system can identify rent payments made via check or electronically and regardless of where it’s made through a landlord’s payment portal or a digital payment platform such as Venmo. The information is only supposed to be incorporated if it would improve eligibility.
Fannie Mae estimates that 17% of recent applicants who weren’t recommended for a mortgage would have qualified if rental payments had been taken into consideration.
A disproportionate share of people without enough traditional credit history to qualify for a mortgage are Black, so Fannie Mae hopes the move to include rental payments will be a step toward correcting the racial homeownership gap. Twenty-nine percent of black borrowers point to a lack of credit history as the main obstacle to getting approved for a mortgage compared to only 18% of whites, noted Fannie Mae.
“While credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, building credit in the United States is not an equitable endeavor,” wrote Fannie Mae CEO Hugh Frater in a blog post. “Most ways to establish credit involve student loans, credit cards, or parental co-signers. But, people of color are statistically less likely to use these forms of credit to manage their financial lives.”
Why could adding rent payments help?
A recent study from the Urban Institute found that rental history is a very precise predictor of how a borrower will perform making future mortgage payments. Those with no missed payments were much more likely to continue to make on-time payments compared to those who had one or more missed payments.
“It seems obvious that if someone is paying rent consistently it’s likely they could and would pay their mortgage consistently, too,” wrote Frater.
"For many households, rent is the single largest monthly expense. There is absolutely no reason timely payment of monthly housing expenses shouldn't be included in underwriting calculations," added Sandra L. Thompson, acting director of The Federal Housing Finance Agency, which regulates Fannie Mae, in a statement.
However, until now rent payments were rarely considered in mortgage applications. Only 5% of current renters have any information about rental payments on their credit reports because landlords generally don’t share that information with credit bureaus. Often rent payments only appear if there is a problem.
Up to now, lenders evaluating a loan application from co-borrowers have only considered the lowest credit score to determine creditworthiness, which means if one of the co-borrowers has a score below 620, the pair wouldn’t qualify for a mortgage.
Now, lenders can average the lowest and highest FICO scores to determine whether co-borrowers meet the minimum credit score requirements. For example, if you have a credit score of 700 and your partner has a score of 600, the lender will now be able to use the average between the highest and lowest score, in this case, 650, to determine eligibility.