About the Author
Aileth is on the Operations Team with RentReporters. She has been a part of the community since 2018.
The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac will both consider rent payment history as part of their underwriting process so that buyers with limited credit histories can more easily obtain home loans.
Future borrowers now have the benefit of a positive rental payment history being included in an underwriting decision with Acting Director Sandra L. Thompson saying, “For many households, rent is the single largest monthly expense. There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations. 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.”
Freddie Mac adjusted its Desktop Underwriter system to identify rent payments in mortgage applicants’ bank records. This is notable because Desktop Underwriter is an automated system used by Freddie Mac and sometimes the FHA for mortgage underwriting that calculates if a loan meets approval requirements. This means they have actually incorporated rental history into their automated business process to approve mortgages.
Fannie Mae and Freddie Mac are federal government-sponsored entities that are designed to stimulate homeownership, primarily for low, to middle-income households. They do this by purchasing mortgages originated by other companies, so those other companies can originate additional mortgages. Nearly 50% of all mortgages issued in the United States are backed by the federal government.
For example, if you applied for a $300,000 mortgage through Chase bank, Chase would underwrite and issue the mortgage to you that you would then pay back every month. Chase would then need to provide the cash to purchase the home to whoever is selling it. Since you’re only paying back a small amount of the $300,000 that you borrowed, Chase bank would quickly run into cash flow problems when hundreds of thousands of people want to borrow money for their homes, and would have to restrict the number of mortgages they issue and likely charge significantly higher interest rates.
But, if the $300,000 mortgage you applied for met all Fannie Mae and Freddie Mac criteria, one of those companies would purchase what’s called the “underlying mortgage security,” for $300,000 from Chase bank in exchange for a small fee, providing Chase bank with enough cash to lend to another borrower, which helps keeps homes more affordable and interest rates lower.
With the two largest government-sponsored backers of mortgages now factoring on-time rent payments into their decisions, this should provide more access to homeownership for those with limited or no credit histories to obtain a mortgage.
The good news is that Fannie Mae and Freddie Mac will conduct their own investigation into rental history without additional burden on the applicant, or mortgage broker. What’s not known, however, is if this will add any additional time to an already lengthy application process.
In a real estate market like the one we’ve seen since 2020, any additional time in the process could be the difference between getting your dream home within budget, or getting into a bidding war and overpaying, or even missing out on your home altogether.
There are lots of different credit scoring models, all used for different things, for different reasons, by different companies. There are so many different models because over time, the algorithms have been refined to take new factors into account, or weight factors differently when it comes to your credit score.
When approving you for a credit card, a card issuer might use your FICO 9 score, or your Vantagescore3 score, both of which include your rental payment history when determining your score. These newer credit scoring models are used often, but there are lots of credit issuers that have not adopted these newer models. Most mortgage issuers, for example, still use FICO 4 or 5 which does not include your rental history when determining your score.
With this major announcement by the federally backed Fannie Mae and Freddie Mac, more mortgage issuers, or any kinds of lenders, may make the switch to newer credit scoring models that take rental history into account, to help improve approval odds for mortgages, credit products, and other loans.
It’s very important to note, there is a huge difference between your credit score and credit history. A credit score is a simple way to sum up your overall credit health, but it does not provide the full picture for lenders. Lenders like mortgage brokers will look at your full credit history when making decisions.
The more tradelines you have in good standing, like the rental tradeline you would receive as a RentReporters subscriber, the better your approval chances are. It’s possible to have a good credit score, but a thin credit history. For example, if you have a single credit card that is only a couple of years old and you make all your payments on time, you’ll probably have a pretty good credit score, but a very thin history since there is only one tradeline.
With a rental tradeline showing all of your on-time payments, you significantly strengthen your credit history and provide a nice bump to your score too!
A rental tradeline with your entire on-time rent payment history is visible to mortgage brokers when they first check your credit profile, which speeds up your mortgage application process now that Fannie Mae and Freddie Mac will be investigating your rental history.
If you’re looking to get an edge on your real estate competition, and there’s a whole lot of it, a rental tradeline will help you get approved for a mortgage faster and at a better rate, saving you thousands of dollars on your mortgage.