A new program gives lenders a chance to include payment history in underwriting.
First-time homebuyers who want to transition from paying rent to owning a home could benefit from a new underwriting program from Fannie Mae allowing lenders to consider rent payment history.
Fannie Mae is a privately owned, but government supported, organization who backs the mortgage loans lenders make and resell to investors.
While credit bureaus and scoring companies are starting to include rent and utility payments in consumers' credit records, those factors aren’t traditionally considered by Fannie Mae or its sister organization, Freddie Mac. Both organizations – which back many of the mortgages in the U.S. – instead use older versions of the FICO credit scoring system that don't factor in rent and utility payments when helping lenders underwrite mortgage loans.
How will these new rules change mortgage underwriting?
Lenders working with Fannie Mae on mortgages can now use a new feature in their desktop underwriting program which includes rent payments in a mortgage applicant's credit evaluation process.
Typically, a lender will consider the credit report as well as the FICO score when evaluating whether an applicant can get a loan. With this new feature, Fannie Mae can let the loan officer know if a borrower might benefit from a rent payment review, says Fannie Mae spokesperson Rachel O'Grady.
Credit history is an important way to assess a homebuyer's ability to make a mortgage payment, but prospective first-time homebuyers are at a disadvantage if rent payments aren’t on their credit reports, O'Grady says. "According to Fannie Mae research for first-time homebuyers, lenders considering their consistent rent payments can be the difference between them qualifying and not qualifying for a mortgage."
Ron Haynie, senior vice president of housing finance policy for the Independent Community Bankers of America, agrees rental payment history is a good indicator of mortgage payment likelihood.
"Lenders have always tried to obtain a rental reference from the consumers' landlord. While they were helpful in the underwriting process, most of these written references didn’t provide much detail, and there was no way to be sure they were even accurate," Haynie says. "What's different about the new Fannie Mae product is they use the actual payment data from the consumer's bank account over 12 months to verify on-time payment of rent."
How can you get rent payment consideration?
Fannie Mae has notified lenders about the option of considering rent payments when they review applications, but it's also a good idea to ask if your lender is participating in the program when you apply for a mortgage.
"The lenders Fannie Mae has spoken to about this have been excited about this opportunity to help underserved borrowers," O'Grady says. "If lenders adopt this new feature, we believe other industry participants will follow, enabling more credit-eligible first-time homebuyers to qualify for a conventional mortgage."
To qualify, borrowers will need to:
- Be a first-time homebuyer, which means you haven't owned a home for the past three years
- Meet Fannie Mae requirements, which include a FICO score of at least 620 for fixed-rate mortgages; an acceptable down payment (at least 3%, depending on the loan product); and sufficient debt-to-income ratio
- Make 12 months of rent payments that can be identified in the payment history of a bank account. Only a positive history of payments – not missed or late ones – will be considered
The use of rental payment data "should help a lot of first-time homebuyers since rental payments are likely a consumer's biggest monthly expense," Haynie says.
Fannie Mae has no plans yet to include additional payment history, such as utility payments.
"We believe this enhancement is a critical first step to ensuring renters are able to build good credit based on timely rent payments and will help contribute to a better, more equitable housing market for everyone," O'Grady says.
Source: U.S. News