Would-be homebuyers with thin credit files will have a better chance of getting approved for a mortgage if they’ve been paying their rent consistently, thanks to changes to Fannie Mae’s automated underwriting system taking effect next month.

Hugh Frater | Photo credit: Fannie Mae

“Many renters believe they will never be able to buy their own home because of insufficient credit. We can responsibly expand mortgage eligibility by including positive rent payment history in underwriting risk assessments,” said Fannie Mae CEO Hugh Frater, in a statement.

Frater said the changes to Fannie Mae’s Desktop Underwriter which take effect Sept. 18 are believed to be the first example of any large-scale automated mortgage underwriting system tapping into electronic bank statement data to consider rent payment history.

When mortgage applicants grant their permission, rent payments that show up in the payment history of their bank account data can be identified, whether rent was paid with a paper check or electronically through a payment portal or other digital payment solution.

While consistent rent payments will improve the applicants’ chances of being approved, records of missed or inconsistent rent payments identified in the bank statement data won’t hurt their ability to qualify for Fannie Mae-eligible loan, the company said.

That will be an important feature for millions of Americans who fell behind on their rent during the pandemic. According to a recent analysis by the Consumer Financial Protection Bureau, 16 percent of adults living in households that rent say they’re behind on their payments. Of the roughly 7.3 million adults living in households who are behind on rent, nearly half say they are somewhat or very likely to be evicted in the next two months.

According to Fannie Mae, about one in five Americans has little established credit history, with Black and Hispanic consumers more likely to have thin credit files. Less than 5 percent of renters get credit for their rent payments on their credit reports, Fannie Mae said.

When Fannie Mae ran a sample of renters who had been rejected by Desktop Underwriter, it found 17 percent could have been considred eligible if their rental payment history had been considered.

Frater characterized the change as “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. We look forward to working with our industry partners to do what we can together to address this and other barriers to homeownership.”

Tom Wind, an executive with U.S. Bank, said the lender supports Fannie Mae’s efforts and is “excited to roll-out this impactful feature.”

A recent analysis by TransUnion, one of the big three credit reporting agencies, found that half of renters are classified as unscorable or have “subprime” credit scores that make it difficult to qualify for a mortgage.

Including rent payments in the credit file of those consumers allowed about 9 percent of that group went from unscorable to scorable, with an average VantageScore of 631, which is considered “near prime.”

Consumers as a whole got an average boost of 60 points to their credit score when rent payments are included in their credit history, TransUnion said.

Another study by OwnUp found that it’s also important for homebuyers with average credit scores to take the time to compare mortgage rates, because the rates they’re offered will tend to vary more than rates offered to applicants with excellent credit scores.

Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency (FHFA), issued an announcement supporting the change.

Sandra Thompson

“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 FHFA Acting Director Sandra L. Thompson, in a statement. “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.”​

Mitria Wilson-Spotser

Mitria Wilson-Spotser, director of housing policy for the Consumer Federation of America, also welcomed the move, and said the CFA “strongly urges” FHFA to adopt the same policy for Freddie Mac.

“Because rent is the single largest monthly payment for many households, timely payment should absolutely be included in underwriting calculations,” Wilson-Spotser said in a statement.

A Freddie Mac spokesperson said the company would like to see on-time rent payments show up on credit reports and be used for evaluating borrower risk.

“Like homeowners, renters should also benefit from making timely housing payments, which is why Freddie Mac is working to make credit-reporting for on-time rent payments an industry standard and part of the risk assessment when purchasing or renting a home,” the spokesperson said.

Freddie Mac is working with a fintech company, Esusu, which has developed a technology platform that reports rents directly from property management companies to credit bureaus.

Editor’s note: This story has been updated to include perspective from Freddie Mac.

Email Matt Carter

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