Getting approved for a mortgage is about to become a little easier for homebuyers with limited credit history.
The Federal Housing Finance Agency (FHFA) announced Fannie Mae will allow on-time rent payments to help homebuyers qualify beginning September 18. This change seeks to make home loans more accessible to applicants with thin credit profiles.
In a press release, FHFA Acting Director Sandra Thompson pointed out that rent is the single largest monthly expense for many households, and, as such, there is no reason timely payment shouldn’t be included in underwriting calculations.
The change comes as an update to Fannie Mae’s automated underwriting platform, the system that a majority of lenders across the country use. The updated algorithm will identify on-time rent payments in bank statements already submitted by borrowers. There are no additional actions required by borrowers or lenders to use this feature.
The change allows Fannie Mae to use rent payment history as an indicator of creditworthiness for applicants that have limited or no credit history. Twelve months of on-time rent payments would put borrowers in a better position to be approved for a home loan, while missed payments will not result in penalty.
In a test of the new system, 17% of applicants that were previously not approved would have qualified using the new policy.
The change is part of a larger directive by the FHFA and Biden administration to expand access to homeownership and close the racial housing gap.
Rent payments are rarely factored into credit scores because it requires landlords to track and report the data. According to the Wall Street Journal, less than 5% of renters have their rent payments — on time or otherwise — included on their credit reports.
And since Black and Hispanic homeownership rates are lower than white homeownership rates, this barrier to credit history disproportionately affects people of color.
According to the Urban Institute, 32% of black people did not have a FICO score compared to 17.9% of white people.
Making history of on-time rent payments readily accessible to lenders is one way to expand access to homeownership to responsible renters.
“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,” Thompson said.