Effective September 18, 2021, Fannie Mae’s Desktop Underwriter® (DU®) will allow single-family lenders to automatically recognize recurring rent payments within an applicant’s bank statement data, allowing for a more comprehensive credit assessment. Fannie Mae’s DU upgrade opens additional opportunities for homeownership whilst promoting safe and sound lending for qualified renters who may have a modest credit history but a strong rent payment history.
When it comes to generating typical consumer credit scores, landlords are excluded as they don’t submit rent payments to the three major credit-rating agencies, however, mortgage payments are included. Advocates have been pushing for a long time to eliminate this inequity, which essentially prevents first-time buyers who have a history of paying their rent on time and responsibly. Approximately 17% of mortgage applicants in the last three years would have qualified had their rent history been examined, according to Fannie Mae; and while this may not seem like much, this figure contains a significant number of people who have been affected over the course of their lives by discriminatory housing policies.
Fewer than 5% of renters currently have their rent payments reflected on their credit bureau report, placing many prospective first-time homeowners at a disadvantage. Credit history is a critical factor in determining a borrower’s ability to make mortgage payments. In the United States, about 20% of people have little to no credit history, with Black and Hispanic people making up a significant share of this category. In addition, Fannie Mae’s National Housing Survey® indicated that Black customers recognize insufficient credit score or credit history as their single greatest barrier to securing a mortgage and do so at a substantially greater rate when compared to white consumers (29% to 18%). A recent study showed that around 45% of Black Americans owned homes; this is compared to white Americans who sit at a much larger 74%, according to census data released at the end of June. Even in a thriving single-family housing market, the discrepancy persists.
As a proxy for rental payments, a recent study by the Urban Institute looked at how well mortgage performance predicts future performance. Credit scores, which are mostly based on the payment history of credit cards and other types of debt, do not accurately predict mortgage performance, according to the data.
It’s also worth noting that in this new system, missed or late payments will not jeopardize a customer’s ability to buy a home. As Fannie Mae announced in August, they will only use customer information if it improves creditworthiness and an applicant’s prospects of approval. If a renter’s credit score rises, they can reapply without fear of a blemish on their record.
No loans are made to borrowers directly by Fannie Mae. As an alternative, it purchases mortgages from other lenders, including banks. Fannie Mae and its cousin, Freddie Mac, are Government Sponsored Entities (GSEs) founded in the decades following the Great Depression to encourage homeownership and assist individuals in building wealth. Government-backed securities, or GSE mortgages, are backed by the federal government to safeguard lenders from going bankrupt. Nearly two-thirds of all mortgages in the U.S. are held by the GSEs. Because banks can’t sell the resulting mortgage to Fannie Mae if Fannie Mae thinks a loan isn’t a good risk, they often reject loan applications at their discretion.
For the purposes of evaluating these loans, the three major credit agencies (Experian, TransUnion, and Equifax) employ credit scores. To determine if a mortgage application is approved, mortgage underwriters look at a FICO score, generated by the Fair Isaac Corporation. Most banks require a 620 credit score as a minimum to grant a traditional 30-year mortgage, however, it is important to note that experts claim that anyone with a score of less than 700 will be reviewed more closely. With this in mind, Customers with a score above this 700 point threshold may want to hold off on the voluntary rental payment assessment as it is likely it will not be needed for approval in this case.
“For many households, rent is the single largest monthly expense,” claimed Sandra Thompson, FHFA Acting Director. “There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations. 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.”
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