In an effort to bring more racial equality to the mortgage market, the Federal Housing Finance Agency (FHFA) announced recently that on-time rental payments may be used by government entities as part of the mortgage underwriting process.
Government-sponsored entity Fannie Mae found that 29% of Black homebuyers say insufficient credit score or credit history is the biggest hurdle to obtaining a mortgage, compared to just 18% of white consumers.
“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,” said the FHFA’s acting director, Sandra Thompson. “With this update, Fannie Mae is taking another step toward understanding how rental payments can more broadly be included in a credit assessment, providing an additional opportunity for renters to achieve the dream of sustainable homeownership.”
Currently, fewer than 5% of U.S. consumers have their rental history included in their credit report, but the disproportionate amount of Black and Latino Americans who have little other credit history and could benefit from the new rule. A recent Experian study discovered that of those whose monthly rent payments were included in their credit profile, 75% experienced an increase in their FICO score between 11 and 29 points. That difference in credit score could mean the difference between being accepted for a home loan or staying a renter.
In fact, Fannie Mae says 17% of borrowers who were previously turned down for a home loan would now be able to qualify thanks to their timely rent payment history.
Credit scores and histories play a huge role in helping lenders decide whether to approve a mortgage loan. They are snapshots of how trustworthy the borrower is with money. A credit profile is made up of one’s payment history of things like utility bills, credit cards, and car and student loans. (House or apartment rent payments are seldom reported to the credit agencies by landlords.) Credit score factors also include debt-to-credit-limit ratios, the mix of credit types, how much new credit has been opened, and the length of the available credit history.
For many minorities, rent is the largest part of their budget and the biggest payment they make consistently. By allowing Fannie Mae to take rental payment data into account, mortgage lenders around the country will have more flexibility and incentive to loan to those with minimal credit histories. (Fannie Mae does not make home loans itself, but guarantees mortgages made by private lenders, as long as the loans meet certain requirements.)
The new rule is effective as of September 18 and missed rental payments will not be penalized in the new evaluation guidelines. Those who may have been rejected previously due to a lack of credit history may have greater success after September, especially if they have a good track record of timely rent payments. The FHFA is confident the change will aid more renters in their quest to become homeowners.