In an effort to help first-time homebuyers take the plunge into a challenging housing market, mortgage giants Fannie Mae and Freddie Mac now consider rent payments as part of borrowers’ credit histories.

Renters’ dreams of homeownership often run into a quirk of the credit-scoring system: Landlords don’t report rent payments to credit bureaus, so tenants can post a stellar track record of on-time payments yet see no effect on their credit scores. (Mortgage payments, by contrast, are part of your credit score, which makes qualifying for another mortgage easier — if you already have a mortgage.)

Fannie Mae and Freddie Mac have begun allowing lenders to consider loan applicants’ rental histories as part of the underwriting process. With borrowers’ permission, lenders can use bank account data to identify up to 12 months of rent payments.

A 17% boost in creditworthy applicants

The policy would help about one in six would-be borrowers move into homeownership, according to Fannie Mae. In other words, this initiative is designed for consumers who are close to qualifying for a mortgage but not quite there. Upon reviewing a sample of mortgage applicants who had not owned a home in the past three years and whose applications were denied, about 17 percent of those would have been approved had their rental payments been taken into account, Fannie Mae reports.

Fannie Mae says its new system will spot rent payments that appear in the borrower’s bank records. Fannie says that applies whether you paid the rent by check or electronically, such as via a company’s payment portal or even by Venmo or PayPal.

Fannie Mae and Freddie Mac don’t make loans directly. Instead, they rely on lenders to originate loans that meet its guidelines; Fannie and Freddie then buy loans and package them as investments. The regulator overseeing Fannie and Freddie has endorsed the ide.

“For many households, rent is the single largest monthly expense,” said Sandra L. Thompson, director of Fannie and Freddie overseer the Federal Housing Finance Agency, in a statement at the time of Fannie’s announcement. “There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations.”

Addressing the racial gap

Fannie Mae says the new effort takes aim at the persistent racial gap in housing. Just 45 percent of Black Americans owned their homes as of the second quarter of 2022, compared with nearly 75 percent of White Americans, according to the U.S. Census Bureau.

Some 45 million American consumers have credit histories that are too sparse to qualify for mortgages. The Consumer Federal Protection Bureau refers to this segment as the nation’s “credit invisibles” — a description that disproportionately includes Black and Hispanic Americans.

The policy from Fannie and Freddie focuses on consumers who have bank accounts, so it’s designed for those who are close to being creditworthy. It wouldn’t help the small share of Americans who don’t have bank accounts.

For those borrowers who can use rental payments to propel themselves into creditworthiness, the policy is “a blessing,” says Magesh Sarma, chief information and strategy officer at AmeriSave Mortgage. “We send a lot of customers away because they’re not credit-eligible. This is going to make dreams of homeownership available to a lot of customers who are turned away by us.”

Some services let you pay to report rent payments

Fannie Mae and Freddie Mac aren’t the first to notice that there’s no direct way for tenants to report rent payments to credit bureaus. Seeing a hole in the system, a number of companies offer credit reporting services that alert credit bureaus to on-time rent payments, including:

  • Experian RentBureau: If your property management company or landlord works with Experian’s RentBureau, your rent payment data can be reported to Experian. If your landlord doesn’t report through RentBureau, you can sign up through a rent payment service that does, such as RentTrack, PayYourRent or Cozy.
  • Rental Kharma: Rental Kharma reports rent payments to TransUnion. To use the service, you must rent from a property management company or from the owner of the property. Rental Kharma will verify your payment history with your landlord or property manager, and include six months of past rent payments in its reporting. There’s a $50 startup fee to begin using the service, after which you’ll pay $8.95 per month.
  • Rent Reporters: RentReporters sends data about your rent payments to two credit bureaus, TransUnion and Equifax. RentReporters tracks your rent payments by contacting your landlord directly to verify that on-time payment has been made. The sign-up fee is $94.95, which will get you two years of past rent data reporting, then $9.95 per month to maintain the service.