With a high-paying job as an environmental engineer for a shipbuilding company, Nicole Lawrence figured snagging a mortgage and fulfilling her dream of buying a home would be a piece of cake.
But when she applied for a mortgage early this year, she didn’t qualify. Her ex-husband had fallen behind on debts he owed but the couple legally shared, such as car payments and medical bills. That lowered her credit score.
“Devastated,” Lawrence, who lives in Virginia Beach, Virginia, with her two kids, said of how she took the news. “I have a great job, I make a great salary. … I was very disappointed.”
But that sort of financial curveball could soon end for people like Lawrence. An announcement last week by mortgage giant Fannie Mae that it would consider on-time rent payment history as part of mortgage approvals could allow her, along with many other aspiring homebuyers with spotty or insufficient credit reports, to still get home loans.
Lawrence, 39, who divorced in 2019, has been paying rent on a three-bedroom condo for more than a year. “If this could possibly help us (buy a house). … I think that is excellent news.”
Until now, credit records generally haven’t factored in rent payments because few landlords provide the information to credit bureaus and some bureaus aren’t technically set up to include it, says Malloy Evans, executive vice president of Fannie Mae. The rental data is on the reports of just 5% of renters.
But new technology is allowing Fannie Mae to check rent payment histories electronically through bank statements, with the borrower’s permission. The new policy will take effect on Sept. 18. Freddie Mac says it's working to include rent payments in its mortgage reviews as well.
Consumer advocates say rent payment is likely the best indicator of whether a homeowner will default on a mortgage – far more accurate than FICO scores, which rely on transactions such as credit card and car payments.
“It seems obvious that if someone is paying rent consistently it’s likely they could and would pay their mortgage consistently, too,” Fannie Mae CEO Hugh Frater said when the company made the announcement.
Fannie Mae and Freddie Mac don’t provide mortgages directly to homebuyers. Rather, the government-sponsored enterprises buy the loans from banks and other lenders and sell them to investors.
But if their automated underwriting systems determine that a homebuyer is eligible for a mortgage that Fannie and Freddie would buy, lenders generally approve them. Fannie and Freddie purchase about 60% of U.S. mortgages, according to the Federal Housing Finance Agency.
Boon for first-time buyers, Black Americans
The new policy is expected to aid first-time homebuyers, including many low- to middle-income borrowers, who are often denied mortgages because they have scant credit histories. About 20% of the U.S. population has a skimpy credit record, and Black and Hispanic people fall disproportionately in that group, Fannie says. Nearly 30% of Black consumers cite an insufficient credit score or credit history as their biggest obstacle to getting a mortgage, compared with 18% of white consumers.
“We’re looking for a way to really provide more inclusive access to mortgages,” Evans says.
In a recent sampling of mortgage applicants who had not owned a home the past three years and were rejected by Fannie’s underwriting system, 17% could have been approved if rent payment histories were included, the company says.
Lawrence, the Virginia Beach resident, says buying a home would signify “independence and a fresh start" after her divorce.” She adds it would allow her to build wealth instead of burning cash on rent every month.
“I just want to have my own place,” Lawrence says.
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Lakisha Williams, a Redfin real estate broker in Hampton Roads, Virginia, says that while some of her Black clients don’t have the money to buy a house, many can’t get a mortgage simply because they “don’t know how to play the FICO game.”
“These people have great income, a solid job, but their credit scores” are low or their records are skimpy because they never sought credit cards or they paid for cars with cash, Williams says. “They just don’t know what they need to have. We just know we need a roof over our heads. We’ll get a car. We don’t know how these things will affect homeownership.”
A disproportionate share of Black wealth is in homeownership, according to the Urban Institute. Yet only about 45% of African Americans owned homes in the second quarter, compared with about 74% of white Americans, Census Bureau figures show. And while the housing market has boomed during the COVID-19 pandemic, many aspiring first-time buyers have been boxed out.
How it works
Here’s how Fannie’s new setup will work: If the company’s automated system determines that a mortgage isn’t eligible to be purchased, it will check whether a 12-month history of on-time rental payments would change that decision, according to an analysis by the Urban Institute, which conducts economic and social policy research. If so, Fannie will tell the lender, which can then ask the borrower for permission to examine their bank statements.
Assuming the borrower agrees, the lender will order a report from a Fannie-approved technology vendor that will check the bank statements for rent payments made by check or automatic debit. If the rental history matches the amounts on the borrower’s application, the loan will be declared eligible for sale to Fannie Mae.
At the same time, missed or inconsistent rental payments will not hurt their ability to get a mortgage, Fannie says.
Evans says he expects adoption of the new policy “to be modest at first as consumers understand the opportunity and get comfortable being able to provide their permission” to access their bank statements. Also, while hundreds of lenders now work with technology vendors, most do not, according to Fannie Mae and the Urban Institute. And so banks and other lenders must establish those ties.
'We can help more people'
Cathleen Pannicia, who heads the residential mortgage team at Customers Bank, with branches from Philadelphia to Boston, says the lender works with a vendor to tap into credit bureau information and plans to expand that relationship to include the rental payment data.
“We want to serve the communities where we are and this going to help us do that,” Pannicia says of Fannie’s new policy, noting that more than half of its mortgages are to first-time buyers. “We can help more people.”
Joe Bilko, chief revenue officer for AmeriSave Mortgage, one of the nation’s largest mortgage providers, says setting up the system with a vendor “is our highest priority. ... This absolutely has the ability to turn declines into approvals.”
Aaron Klein, senior fellow at the Brookings Institution, says Fannie’s new policy "is a step in the right direction but a small step.”
A credit score, he says, is “a terrible predictor” of whether a homeowner will repay their mortgage on time each month. One in 5 credit reports includes a mistake, and the records include odd lapses, such as “they didn’t pay a bill six years ago.”
Instead, he says, lenders should rely more heavily on consumers’ recent payments of rent as well as utility, cable and cellphone bills.
Fannie Mae, meanwhile. says it's working with industry partners to ensure that rent payments are automatically reported to credit bureaus so they can be factored into all loans and transactions that rely on a credit score.
“We’re not stopping here,” he says. “This is a starting place.”
This article originally appeared on USA TODAY: Fannie Mae loan: Mortgage giant to include rent payments in approvals