Renters who want to become homeowners may soon find it easier to buy a home thanks to a significant lending policy change from Fannie Mae.
The government-sponsored enterprise announced recently that it will soon begin considering people’s rent payment history when determining whether to approve them for a mortgage.
Beginning Sept. 18, 2021, Fannie Mae’s Desktop Underwriter will enable lenders to automatically identify recurring rent payments in borrowers bank statements to provide a more comprehensive look at their credit profile.
The goal of this, according to Fannie Mae, is to make it easier for renters and those with thin credit histories to qualify for a mortgage.
Before this policy change, a person’s rent history was likely not considered as part of the underwriting process as rent payments typically don’t appear on a credit report. In fact, according to Fannie Mae, fewer than 5% of renters have their rent payments appear on the credit report.
“For qualified renters who may have limited credit history but a strong rent payment history, Fannie Mae’s DU enhancement creates new opportunities for homeownership while promoting safe and sound lending,” Fannie Mae said in its announcement.
Importantly, Fannie Mae notes that this policy will only be used to positively improve a person’s credit profile, taking only “consistent” rent payments into account.
“Any records of missed or inconsistent rent payments identified in the bank statement data will not negatively affect the applicant’s ability to qualify for a loan sold to Fannie Mae,” the GSE said.
Put more simply, if a borrower pays their rent on time each month, that will be considered when determining whether to approve them for a mortgage. If they do not have a consistent rent payment history, it will not count against them.
"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," Federal Housing Finance Agency Acting Director Sandra Thompson said. "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.”
According to Fannie Mae, this change could have a significant impact on a large number of potential homebuyers, especially those in minority communities.
Fannie Mae notes that “approximately 20% of the U.S. population overall has little established credit history – a group in which Black and Hispanic consumers are disproportionately represented.”
However, if rent payments are considered, it can make a substantial difference in the number of people who are approved for a mortgage.
“In a recent sample of mortgage applicants who had not owned a home in the past three years and did not receive a favorable recommendation through Desktop Underwriter, 17% could have received an Approve/Eligible recommendation if their rental payment history had been considered,” Fannie Mae said.
In a statement, Fannie Mae CEO Hugh Frater said that the GSE can “responsibly expand mortgage eligibility” by considering positive rent payment histories.
“Many renters believe they will never be able to buy their own home because of insufficient credit,” Frater said.
“We believe this will be the first time any large-scale automated mortgage underwriting system will leverage electronic bank statement data to consider positive rent payment history,” Frater continued.
“It is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners,” Frater added. “We look forward to working with our industry partners to do what we can together to address this and other barriers to homeownership.”
Fannie Mae’s announcement was welcomed by the California Association of Realtors, who said that “thousands of Californians” may be able to buy a home once this change takes effect.
“California REALTORS applaud this change to Fannie Mae's automatic underwriting system, which will open the door to homeownership for thousands of Californians,” CAR President Dave Walsh said.
“Rental payments are often the largest ongoing payment history for non-homeowners and can be a good indication of credit worthiness,” Walsh continued.
"For years, CAR has advocated for the use of alternative credit scoring and broadening ways to identify creditworthy buyers,” Walsh concluded. “The actions taken today by Fannie Mae and its regulator, the Federal Housing Finance Agency, are a positive step in that direction."
This also marks the second time in the last few months that a government-related agency has made a change to its lending policies designed to make homeownership easier to accomplish for certain borrowers.
In June, the Federal Housing Administration announced changes to its rules surrounding student loans to “make it easier for borrowers with student loan debt to qualify for a federally insured mortgage.”
Fannie Mae’s rent payment policy change goes into effect on Sept. 18, 2021.