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Fannie Mae announced this week that it will include your rental payment history as part of the mortgage application process, a move intended to provide better access to credit for borrowers.
Lenders and housing experts say this expansion, starting in September, will help more new borrowers and underrepresented groups gain access to home ownership.
“Monthly rent represents the biggest financial obligation for many first-time home buyers and is a clear indicator of a buyer’s ability to afford a monthly mortgage payment,” says Paul Appleton, Managing Director, Head of Mortgages and consumer credit at Union Bank. “This change creates a more complete financial picture of the borrower because rent payments are rarely flagged on a credit report.”
Fannie looked at a recent sample of mortgage applicants and found that 17% would have qualified for a mortgage if rental payment history had been part of the approval process.
Lease payment history is a good predictor of credit profile
According to a study by the Urban Institute, rent payment history has proven to be a reliable indicator of creditworthiness. In their analysis, he found that on-time payments were a better predictor of future payments than a low credit score and high loan-to-value loans.
Many experts agree, including Emanuel Santa-Donato, vice president of capital markets at Better.com.
“Better has also researched the topic and found that a 12-month clean housing payment history is an even stronger predictor of serious delinquency than a FICO score,” says Santa-Donato. “We are delighted that Fannie Mae is on board and moving its credit criteria in this direction.”
According to an analysis by the Consumer Financial Protection Bureau, some 26 million Americans are credit blind and another 19 million have outdated credit histories. That’s why lenders’ overreliance on FICO scores has “canned millions of families, especially people of color,” says Aaron Klein, senior fellow, economic studies at the Brookings Institution.
“The majority of Americans aren’t prime borrowers, despite the fact that most of them haven’t defaulted on a loan,” Klein says.
How Rental History Affects Getting a Mortgage
Fannie lets borrowers decide if they want to use their rent payment history in their mortgage application. A history of regular, on-time payments can help borrowers who might not otherwise qualify for a mortgage get approved.
On the other hand, records of missed payments will not harm a borrower’s chances of qualifying for a mortgage. Lenders will be able to identify rent payments through bank account data, including checks or electronic payments.
However, a good rent payment history won’t necessarily help you get a lower interest rate.
“Mortgage interest rates are determined by many factors, including [the] the amount of the loan, the loan to value ratio and the long-term interest rates, so I expect that the main benefit of this change will be better access to credit rather than a change in interest rates themselves,” says Appleton.