One of the major barriers to homeownership for first-time homebuyers is their limited credit background. It takes time to establish a full credit history, and only certain types of regular on-time rent payments, like auto loans, student loans, and credit card payments, make it into your report. Sometimes your limited credit history does not give an accurate picture of your ability to repay a loan.
Fannie Mae’s New Approach to Creditworthiness
Apparently, federally backed mortgage investor Fannie Mae agrees. Recently the company decided to accept rent payments as a qualifying factor for home loans.
The Role of Fannie Mae and Freddie Mac in Mortgage Lending
The government created Fannie Mae and its counterpart, Freddie Mac, to promote U.S. homeownership and maintain a stable housing market. They buy up a majority of the mortgages made by private lenders and resell them to other investors. Most lenders want to get existing loans off their books as quickly as possible to free up cash for new loans, so reselling loans to Fannie and Freddie is very popular. The two entities will only buy home loans that fit their qualification rules, so lenders are highly motivated to stick to those rules. That means many lenders will also start embracing rent payments as a qualification measure on applications.
Addressing Racial Disparities in Homeownership
Fannie Mae made this change to help close the homeownership gap between races in the U.S. “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.”
Recognizing Rent Payments as a Key Financial Commitment
“For many households, rent is the single largest monthly expense. Sandra L. Thompson, acting director of The Federal Housing Finance Agency and Fannie Mae’s regulator, stated, “Underwriting calculations should absolutely include the timely payment of monthly housing expenses.”
How the Process Works for First-Time Buyers
So, if you are a first-time buyer with little established credit, lenders can now factor in your history of timely rent payments when assessing your creditworthiness. The process works like this: You apply for a mortgage with your traditional credit report. If you do not qualify based on that history, your lender will then ask to examine your bank statements. Fannie Mae’s automated system will then scan for 12 straight months of on-time rental payments. It doesn’t matter if you paid by check or electronically. The system should be able to detect rent payments even made through Venmo or other online platforms. And Fannie Mae says this data will only be incorporated if it will improve your eligibility, not if it will hurt your chances.
The Impact of This Change on Mortgage Approvals – On-Time Rent Payments
Fannie Mae reports that about 17% of applicants with limited credit history who don’t qualify for a mortgage could be approved if lenders included their rental payments. If you’re unsure whether you meet all the mortgage requirements for homeownership, ask your lender if they can consider your history of timely rent payments.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
