In an effort to help first-time homebuyers take the plunge into a challenging housing market, mortgage giant Fannie Mae now considers 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.)
Starting Sept. 18, Fannie Mae lets lenders 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.
Fannie Mae CEO Hugh Frater says the initiative is aimed at removing “systemic barriers” to homeownership for those who haven’t been able to build their credit scores with credit cards and auto loans. And he stresses that the payment data will be used only to boost borrowers’ credit scores.
“There is no way it can hurt their credit score, and it will only be used to help eligible homebuyers qualify for mortgage credit,” Frater wrote recently on Fannie Mae’s website. “Any records of missed or inconsistent rent payments identified in the bank account data (and not already reflected on the applicant’s credit report) won’t negatively affect their ability to qualify.”
A 17% boost in creditworthy applicants
The new policy would help about one in six would-be borrowers move into homeownership, Fannie Mae reports. In other words, this initiative is designed for consumers who are close to qualifying for a mortgage but not quite there.
The lending giant looked at a sample of mortgage applicants who had not owned a home in the past three years and whose applications for Fannie Mae loans were denied. About 17 percent of those rejected applicants would have been approved had their rental payments been taken into account.
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 doesn’t make loans directly. Instead, it relies on lenders to originate loans that meet its guidelines; Fannie then buys loans and packages them as investments. Freddie Mac, the other large government-sponsored lending firm, has yet to begin considering rental payment history — but the regulator overseeing Fannie and Freddie has endorsed the idea.
“For many households, rent is the single largest monthly expense,” Sandra L. Thompson, acting director of the Federal Housing Finance Agency, said in a statement. “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 in the second quarter of 2021, compared with nearly 74 percent of White Americans, according to the U.S. Census Bureau.
“This gap has stood firm since the early 1900s, and it stems in part from historically racist government policies that disadvantaged Black Americans and stymied their ability to build wealth and economic stability,” Frater wrote. “It has been estimated that if homeownership rates were the same for all races, the wealth gap between Black and White families would be reduced by 31 percent.”
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.
Fannie Mae’s new policy 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.
But for those borrowers who can use rental payments to propel themselves into creditworthiness, Fannie’s new policy is “a blessing,” says Magesh Sarma, chief information officer at AmeriSave Mortgage in Atlanta. The company’s loan officers will alert borrowers about the program, and instruct them to provide some information on an online portal. From there, Fannie’s systems verify the rent payments.
“We send a lot of customers away because they’re not credit-eligible,” Sarma says. “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 isn’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. Three examples:
- 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.