Paying your rent on time can now help you qualify for a mortgage

Renters who pay their landlords on time may start to find it easier to get a mortgage.

Over the weekend, federally backed home loan investor Fannie Mae showcased a tool that allows lenders to assess whether tenants are paying on time and use that information to help them qualify. for a mortgage. This decision is designed to help more people with limited credit histories or poor credit scores become homeowners.

Here’s how it works: Once you apply for a mortgage, the lender runs it through Fannie Mae’s underwriting software to determine if Fannie Mae would purchase the loan. (Most lenders won’t give a loan. Fannie Mae or Freddie Mac, his counterpart, won’t buy.) Now, if the answer is not based on traditional inputs like credit score, tenants have another. luck.

At this point, the lender will ask for permission to search your bank statements. An automated system will then look for records of 12 consecutive months of on-time lease payments. Fannie Mae says her system can identify rent payments made by check or electronically and regardless of where they are made through a landlord’s payment portal or a digital payment platform such as Venmo. . Information is only meant to be integrated if it improves eligibility.

Fannie Mae estimates that 17% of recent applicants who were not recommended for a mortgage would have qualified had rent payments been considered.

A disproportionate share of people without sufficient traditional credit histories to qualify for a mortgage are black, so Fannie Mae hopes the decision to include rent payments will be a step towards closing the racial gap in home ownership. the property. Twenty-nine percent of black borrowers say a lack of credit history is the biggest barrier to mortgage approval, compared to just 18 percent of whites, Fannie Mae noted.

“While a credit history is a key component in assessing a borrower’s ability to make a mortgage payment, creating credit in the United States is not a fair business,” Fannie CEO wrote. Mae, Hugh Frater, in a blog post. “Most of the ways to build 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 might adding rent payments help?

A recent Urban Institute study found that rental history is a very accurate predictor of a borrower’s performance on future mortgage payments. Those who did not default were much more likely to continue making payments on time than those who had one or more missed payments.

“It seems obvious that if someone pays their rent consistently, it is likely that they could and would pay their mortgage consistently,” Frater wrote.

“For many households, rent is the most important monthly expense. There is absolutely no reason why the timely payment of monthly housing expenses should not 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 have rarely been factored into mortgage applications. Only 5% of current renters have information about rent payments on their credit reports, as landlords typically don’t share this information with credit bureaus. Often, rent payments only show up when there is a problem.

Another change

So far, lenders evaluating a co-borrower loan application have only considered the lowest credit score to determine creditworthiness, meaning that if one of the co-borrowers has a score below 620, the pair would not qualify for a mortgage.

Now lenders can average the lowest and highest FICO scores to determine if co-borrowers meet 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 the credit score. eligibility.

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