In an effort to help first-time homebuyers jump into a tough housing market, mortgage giant Fannie Mae is now looking at rent payments as part of borrowers’ credit history.
Renters’ dreams of home ownership often collide with a quirk of the credit reporting system: Landlords fail to report rent payments to credit bureaus. So tenants can view a stellar record of on-time payments without seeing any effect on their credit scores. (Mortgage payments, on the other hand, are part of your credit score, making it easier to qualify for another mortgage, if you already have a mortgage.)
Starting September 18, Fannie Mae allows lenders to review the rental history of loan applicants as part of the underwriting process. With the permission of borrowers, lenders can use bank account data to identify up to 12 months of rent.
Fannie Mae CEO Hugh Frater said the initiative aims to remove “systemic barriers” to homeownership for those who have not been able to build their credit rating with cards. credit and auto loans. And he points out that payment data will only be used to increase borrowers’ credit scores.
“There is no way this could hurt their credit score, and it will only be used to help qualified homebuyers qualify for mortgage credit,” Frater wrote recently on Fannie Mae’s site. “Any records of missed or inconsistent rent payments identified in the bank account data (and not already reflected on the applicant’s credit report) will not adversely affect their ability to qualify.” “
A 17% increase in solvent applicants
The new policy would help about one in six potential borrowers access homeownership, reports Fannie Mae. In other words, this initiative is designed for consumers who are about to qualify for a mortgage, but are not quite there.
The lending giant examined a sample of mortgage applicants who had not owned a home in the past three years and whose applications for Fannie Mae loans were turned down. About 17 percent of unsuccessful applicants would have been approved had their rent payments been considered.
Fannie Mae says her new system will track rent payments that show up in the borrower’s bank statements. Fannie says this applies whether you paid rent by check or electronically, for example through a company’s payment portal or even Venmo or PayPal.
Fannie Mae does not make loans directly. Instead, he relies on lenders to make loans that meet his guidelines; Fannie then purchases loans and groups them together as investments. Freddie Mac, the other major government-sponsored loan company, has yet to begin reviewing the history of rent payments – but the regulator overseeing Fannie and Freddie has endorsed the idea.
“For many households, rent is the single most important monthly expense,” said Sandra L. Thompson, acting director of the Federal Housing Finance Agency, in A declaration. “There is absolutely no reason why the timely payment of monthly housing expenses should not be included in underwriting calculations.”
Bridging the racial divide
Fannie Mae says the new effort targets the lingering racial divide in housing. According to the US Census Bureau, only 45% of black Americans owned their homes in the second quarter of 2021, compared to almost 74% of white Americans.
“This gap has remained steadfast since the early 1900s, and it stems in part from historically racist government policies that have disadvantaged black Americans and hampered their ability to create wealth and economic stability,” Frater wrote. “It was estimated that if homeownership rates were the same for all races, the wealth gap between black and white families would be reduced by 31%.”
Some 45 million American consumers have too rare a credit history to qualify for a mortgage. The Consumer Federal Protection Bureau describes this segment as “the nation’s”invisible credit”- a description that disproportionately includes blacks and Hispanics.
Fannie Mae’s new policy focuses on consumers who have bank accounts, so it’s designed for those who are on the verge of being creditworthy. It would not help the small proportion of Americans who do not have a bank account.
But for borrowers who can use rent payments to boost creditworthiness, Fannie’s new policy is “a blessing,” says Magesh Sarma, chief information officer at AmeriSave Mortgage in Atlanta. The company’s loan officers alert borrowers to the program and ask them to provide information through an online portal. From there, Fannie’s systems verify the rent payments.
“We are referring a lot of customers because they are not eligible for credit,” Sarma explains. “This will make the dreams of home ownership accessible to many clients that we turn down. “
Some services allow you to pay to report rent payments
Fannie Mae isn’t the first to notice that there is no direct way for tenants to report rent payments to the credit bureaus. Seeing a hole in the system, a number of companies offer credit reporting services that alert credit bureaus to on-time rent payments. Three examples:
- Experian Rental Office: If your property management company or landlord works with Experian’s RentBureau, your rent payment data may be shared with Experian. If your landlord doesn’t report through RentBureau, you can sign up through a rent payment service that does, such as RentTrack, PayYourRent or Cozy.
- Kharma rental: Rental Kharma reports rent payments to TransUnion. To use the service, you must rent from a property management company or the property owner. Rental Kharma will verify your payment history with your landlord or property manager and include six months of past rents in their reports. There is a start-up fee of $ 50 to start using the service, after which you will pay $ 8.95 per month.
- Rent reporters: RentReporters sends data on your rent payments to two credit bureaus, TransUnion and Equifax. RentReporters tracks your rent payments by contacting your landlord directly to verify that on-time payment has been made. The registration fee is $ 94.95 which will get you two years of past rent data reports, then $ 9.95 per month to maintain the service.