New mortgage rule makes it easier for renters to buy homes
August 12, 2021
A new lending rule helps renters qualify for home loans
To qualify for a mortgage, you typically need a well-established credit history.
That can be challenging for first-time home buyers who haven't used credit cards or borrowed much in the past.
In fact, about 20% of Americans lack a strong credit history according to mortgage agency Fannie Mae.
The good news? Fannie just passed a new rule allowing mortgage lenders to use past rent payments to help you qualify for a home loan.
So if you pay your rent on time — and have for a while — it could make getting a mortgage a lot easier.
Getting a mortgage with no credit
Mortgage lenders rely heavily on credit scores and credit reports when assessing a borrower's risk.
That means renters who have never had a credit card, car loan, student loan, or other credit account present a challenge. They often have a harder time buying a home and, in many cases, get a higher interest rate when they do.
Though some lenders will allow borrowers to use on-time rent payments as a credit history of sorts, not all do. And even then, getting a mortgage with no credit requires a lot of legwork.
Borrowers often need to provide copies of cashed rent checks, statements from their landlord, and other documentation to prove payment. In most cases, it's not an easy path forward.
Fannie Mae's new rule seeks to address this challenge.
For renters with little or no credit history, it should now be much easier to get approved based on rent payments instead of ‘traditional' credit.
How Fannie Mae's new policy helps renters buy homes
Fannie Mae's announcement will help renters in two ways.
First, it allows all lenders who issue Fannie Mae-guaranteed loans to easily include past rent payments in their underwriting calculations. That means home buyers with no credit won't have to search far and wide for a lender willing to approve them based on ‘alternative' credit data.
On top of this, it will also automate the process for finding and assessing a home buyer's past rent payments.
Thanks to an update in Fannie's digital underwriting system, lenders will be able to pull rent payments directly from a borrower's connected bank account data — regardless of whether they were made via check, ACH, or another digital payment system.
According to Fannie Mae, the move should make it easier for many renters to become homeowners.
"It is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners," said Hugh R. Frater, Fannie Mae's chief executive officer.
Who will benefit from this change?
Renters as a whole will benefit from Fannie Mae's announcement, but it's specifically aimed at renters with no credit or very thin credit (meaning very few accounts or accounts that have only been open for a short amount of time).
Consumers who fall into this category typically need to use ‘alternative' credit histories to qualify for a mortgage.
While rent payments are one of the factors lenders consider in these alternative assessments, things like monthly insurance, utilities, and even phone bill payments can come into play, too — anything that shows consistent, on-time repayment of a debt or balance due.
If you're in this boat, you might also need a higher down payment, a lower debt-to-income ratio, or a particularly strong employment history to offset the unforeseen risk you might present. In many cases, adding a creditworthy co-signer to your loan can help your case as well.
Check your no-credit mortgage eligibility
Fannie Mae's new policy takes effect immediately. Mortgage lenders can begin using the company's underwriting system to automatically pull in past rental payments starting today.
If you're a renter considering buying a home, make sure to ask your lender about this option — especially if your credit history is thin (or nonexistent).
You may find it's much easier to qualify for a mortgage than you thought.
Aly J. Yale