Millions of renters with little or no credit have long been excluded from the American dream of homeownership. For some, it’s about to change for the better.
Starting September 18, mortgage giant Fannie Mae will look at the most recent 12-month rent payment history when lenders run its automated credit check system. Future owners should grant Fannie permission to review rent payment records from checking accounts or electronic services like PayPal or Venmo.
Under the current system, landlords do not report rent payments to the Big Three credit rating companies, so they are not included in the calculation of traditional consumer credit scores. Mortgage payments are however included. Advocates have long fought to change this disparity, which can effectively block first-time buyers with a stellar record of responsible payment of their rent on time.
“For many households, rent is the most important monthly expense. There is absolutely no reason why timely payment of monthly housing expenses should not be [mortgage] underwriting calculations, ”Sandra L. Thompson, acting director of Fannie’s regulator, the Federal Housing Finance Agency, said in a statement last month.
Fannie Mae estimates that about 17% of applicants in the past three years would have qualified for mortgages had their rent history been taken into account. It may not seem like much, but it includes a large portion of Americans most affected by discriminatory housing policies that date back more than a century.
“Powerful additional tool”
“This is a very powerful additional tool to help people who have been left out of this part of the market,” Cecilia Isaac, chief loan officer of OneUnited Bank, the largest black-owned bank, told CBS MoneyWatch. in the USA.
Fannie Mae deliberately aims to narrow the racial wealth gap, said Hugh Frater, CEO of Fannie Mae, in a recent blog post. Census figures at the end of June showed that about 45% of black Americans owned homes in the second quarter, compared to 74% of white Americans. It is a disparity that persists even in the midst of a.
Still, a history of on-time rent payments can be a great indicator of someone’s creditworthiness that someone will pay their mortgage on time, according to a recent Urban Institute study. Those who make their monthly mortgage payments on time for a year have about 2.8% risk of default, including people with lower traditional credit scores, said Jun Zhu, co-author of the study. the Urban Institute and Clinical Assistant Professor at Indiana-Bloomington University. .
“Right now, using Fannie Mae’s new system, [potential borrowers] have a second chance, and we show that their probability of default is actually very low. So it’s really a good thing to include rental payments into consideration, ”Zhu told CBS MoneyWatch.
Another important feature: Consumers won’t ruin their chances of buying a home if a missed or late payment occurs. Fannie Mae will only use the information if it strengthens a person’s creditworthiness and chances of being approved, according to their announcement in August. Potential landlords can reapply if their credit score improves and not worry about a bad rating from a previous rent check.
“If you go through this process and the results of your rental history review are not positive, it will not affect your ability to qualify on a regular basis. They won’t use it against you. And it is important that the consumer knows this. “Said Isaac of OneUnited.
Reduce the wealth gap
In total, about 45 million Americans have poor or limited credit histories. This makes it difficult to apply for a mortgage, according to a 2015 report from the Consumer Federal Protection Bureau. Black and Hispanic applicants are more likely to have little or no history, which contributes to the country’s huge wealth gap.
“Homeownership is a generator of wealth, in the sense that you have an asset that appreciates over time, that you can keep or that you can pass on to a relative, or you can use it as basis for advancing in rank, “says Isaac. “Building equity in a house allows the wealth gap – by substantial amounts – to narrow.”
For Jenn Gummel, a real estate agent in Dover, Delaware, the change in rental income can’t come soon enough. Most first-time buyers she meets ask her if they can include rental history – and are surprised to learn they can’t, she told CBS MoneyWatch.
“Almost all first-time buyers have told me ‘I really want the subscription to reflect my rental payment history.’ It’s not really what they’re saying, but it’s what they’re trying to say, “Gummel said in a video produced for his real estate clients on YouTube.
Gummel recalls a recent New York client whose mortgage application was turned down.
“They were paying crazy rent in New York and their rent [in Delaware] much lowered. If they could have used their rent payment history, they probably could have secured a mortgage, ”Gummel said.
Fannie herself does not lend directly to borrowers. Rather, he buys mortgages from lenders, including banks. Called government-sponsored entities, Fannie Mae and her cousin Freddie Mac were part of programs created in the decades after the Great Depression to boost homeownership and help build wealth. Mortgages held by GSEs are guaranteed by the federal government to also help protect lenders from financial ruin.
GSEs own over 60% of all residential mortgage loans in the United States. So if Fannie Mae says a loan is not a good risk, banks usually reject an application because they cannot sell the resulting mortgage to Fannie.
Experian, TransUnion and Equifax
The valuation of these mortgages is linked to credit scores like those used by the big three credit bureaus – Experian, TransUnion and Equifax. Mortgage underwriters use a FICO score, compiled by the Fair Isaac Corporation. The minimum score for a conventional 30-year mortgage at a bank is usually 620. But anyone with a score below 700 tends to be scrutinized closely, experts say.
Since the rent payment check is voluntary, consumers may want to wait if their score is above around 700, said Jun and Gummel of the Urban Institute. This is because they are likely to be approved without it.
“Obviously, if they have a credit score of 760 or 700, I don’t really think they will need [the check]”Gummel told CBS MoneyWatch.” These are really people who are maybe just below the bar or just above the bar. Just to give them a little push. ”