Good News for Buyers: Rent Payments Matter Now
Good news for Buyers: Rent payments matter now
In a market heavily tilted toward Sellers, boxed-out Buyers have something to cheer about. Mortgage giant Fannie Mae recently announced that they would consider on-time rent payments as a part of mortgage approvals beginning September 18, 2021. This is an incredible development for many Buyers who’ve been shut out of the market due to credit issues. Let’s look at some of the implications and how this may help you and your clients.
Why rent payments matter to Buyers, especially now
Millennials currently comprise the largest market share of potential Buyers. However, they also lag behind other generations in terms of home ownership. Affordability, lack of inventory, and the crushing burden of debt (particularly, student loan debt) have all factored into these challenges. But with Fannie Mae’s change (and Freddie Mac likely soon to follow), a wider swath of Buyers have a better chance to pursue home ownership.
The logic behind the change is simple. If you’re making timely rent payments, you’re likely to make timely mortgage payments. However, this simple logic eluded lenders and underwriting systems until now.
This is a big deal, especially for younger Buyers and Black Buyers. According to Fannie Mae, “About 20% of the U.S. population has a skimpy credit record, and Black and Hispanic people fall disproportionately in that group.” Additionally, “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 [W]hite consumers.”
In short, this decision is a step in the right direction for allowing people to access home ownership. It may contribute to closing a cavernous racial gap in home ownership. According to the Census Bureau, only 45% of Black Americans owned a home, compared to 74% of White Americans in Q2, 2021.
How will rent payments factor in going forward?
Technology will play an important role in this shift. According to Fannie Mae, their automated underwriting system will review whether a loan application is eligible for purchase. This is important, since Freddie and Fannie purchase up to 60% of all American mortgages.
If the automated system says the loan would NOT be eligible for purchase, it will then turn to a 12-month record of on-time rent payments. If that analysis determines that a years’ worth of on-time payments would make the mortgage eligible for purchase, Fannie Mae would contact the lender.
Then, Fannie Mae would ask the lender to ask the borrower for permission to access the potential Buyer’s bank statements to determine whether they had made on-time payments over 12 months. If they have, it could increase the likelihood that a Buyer could become eligible for a mortgage. Additionally, missed or inconsistent payments wouldn’t necessarily reduce the likelihood of mortgage eligibility.