The added feature, which will launch on September 18th, 2021 via Fannie Mae’s Desktop Underwriter (DU), automatically identifies recurring rent payments in an applicant’s bank statement data.
This will allow mortgage lenders to “deliver a more inclusive credit assessment,” with the permission of the borrower.
Fannie Mae CEO Hugh R. Frater said he believes it’s the first time a large-scale AUS will leverage electronic bank statement data to incorporate positive rental history.
The move is expected to even the playing field for homeowners and renters by “correcting the housing inequities of the past.”
And it should lead to more mortgage approvals for those who otherwise may not have qualified for a home loan due to insufficient credit history.
How Rental History Can Help You Get Approved for a Mortgage
- The addition of positive rental history can be used as compensating factor during the underwriting process
- Beneficial if the borrower has a limited traditional credit history (lack of credit cards, loans, etc.)
- Positive rents will automatically be pulled from submitted bank statements and incorporated into the underwriting engine
- Nearly 20% of denied applicants from a sample study could have been approved with this change in place
Prior to this announcement, it was possible to use positive rental history as a compensating factor if you didn’t quite qualify for a mortgage.
But it’s a manual process and one that could prove difficult because you need to gather paperwork and potentially get your landlord to sign off on it.
Fannie Mae’s new initiative automates this by simply gleaning rental payments from a borrower’s bank statements.
All an applicant has to do is give their OK for the system to scan for these rental payments and they’ll become a factor in Desktop Underwriter’s recommendation.
According to Fannie Mae research, a history of consistent rental payments is often a deciding factor between applicants who qualify or don’t qualify for a mortgage.
In a recent sample of first-time home buyer applicants (those who had not owned a home in the past three years), Fannie Mae found that 17% could have received an Approve/Eligible recommendation if their rental payment history had been considered.
Unfortunately, these borrowers were likely denied a home loan, simply due to insufficient credit history because fewer than 5% of rental payments are included on credit reports.
Meanwhile, homeowners get positive credit for each on-time mortgage payment they make, which boosts their credit scores over time.
Only Consistent Rental Payments Will Be Considered
- This new measure is intended to help borrowers qualify, not hurt them in any way
- Only recurring rental payments that are found will be factored into the decision
- Missing or inconsistent rental payments will simply be ignored
- Should allow more Black and Hispanic borrowers with limited credit history become homeowners
As noted, Fannie will be able to automatically identify recurring rent payments that are found in the applicant’s bank statement data with their consent.
But only consistent rental payments will be considered, while missed or inconsistent rent payments will not negatively impact a borrower’s ability to qualify.
And these payments can be identified whether paid via paper check or electronically, including via a rental company’s payment portal or other digital solution.
This is great news for qualified renters who may have a limited credit history, but a strong history of paying rent on time.
Fannie Mae believes it will create new opportunities for homeownership while also promoting safe and sound lending because borrowers are simply getting credit where it’s due.
The move should also foster a more inclusive mortgage lending environment, as a disproportionate percentage of the U.S. population with limited credit history happens to be Black or Hispanic.
While this is a positive step in the right direction, one could argue that the credit bureaus themselves incorporate rental history into their reporting.
But that could prove difficult unless more rents are transmitted electronically, as opposed to being paid via check or cash.
It also reinforces the need to have more traditional credit history, such as credit cards, student loans, auto loans/leases on your report if you want to avoid scrutiny when applying for a mortgage.
Ultimately, mortgage lenders still prefer to see at least three active tradelines on your credit report with 24-month+ history.
Positive Rent Payment History Guidelines
- Must be a first-time home buyer and loan has to be a purchase transaction
- Must have been renting for at least 12 months with payment of $300+ per month
- Must purchase a principal residence
- Must have a credit score
- Lender must obtain a 12-month VOA of bank statement data to verify payments
In order to potentially qualify using positive rental history, you’ll need to meet the guidelines above.
They include being a first-time home buyer, having a credit score, paying rent of at least $300 for the past 12 months, and the transaction being a purchase (not a refi).
Assuming you meet that criteria, the lender must obtain a 12-month VOA from an authorized DU validation service asset verification report vendor.
If Desktop Underwriter initially finds that the loan isn’t eligible for sale to Fannie Mae, the system will check if a 12-month history of on-time rental payments would change that outcome.
Assuming it would, Fannie Mae would let the lender know, and they could then request borrower permission to access their bank statements.
This vendor would then send a text or email to the customer to obtain consent in order to access that data.
The key will be using a mortgage originator that is already partnered with one of these vendors, as few mortgage originators use them due to privacy concerns, per the Urban Institute.
So if you think you’re on the cusp of approval, and rent history could help, make sure the lender you use is set up to take advantage of this new process.
Freddie Mac Will Also Use Positive Rental Payments in Mortgage Qualifying
In early November, Freddie Mac jumped onboard and announced a similar initiative that supposedly “incentivizes rent reporting via technology” from a company called Esusu Financial Inc.
Contrary to Fannie Mae’s approach, this tech will send on-time rental history data to credit reports, where it’s typically not found.
To encourage landlords, Freddie Mac will provide closing cost credits on multifamily loans taken out by owners of rental properties.
In turn, they will agree to report on-time rental payments through Esusu’s platform, which will automatically make their way to all three major credit bureaus.
Like Fannie, only positive information will be included. The system will automatically unenroll renters if missed payments occur, preventing any undue harm.
At the moment, less than 10% of renters have on-time rental payment history reflected in their credit scores, despite it being their largest monthly liability.