Millions of renters with little or no credit record have long been shut out of the American dream of home ownership. For some, that's about to change for the better.
Starting September 18, mortgage giant Fannie Mae will consider the most recent 12-month rent payment histories when lenders run its automated creditworthiness check system. Aspiring homeowners must grant Fannie permission to examine rent-payment records from checking accounts or electronic services like PayPal or Venmo.
Under the current system, landlords don't report rent payments to the three big credit-ratings companies, so they aren't included in calculating traditional consumer credit scores. Mortgage payments, however, are included. Advocates have long fought to change that disparity, which can effectively can lock out first-time buyers with a stellar record of responsibly paying their rent on time.
"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 [mortgage] underwriting calculations," Sandra L. Thompson, the 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 over the past three years would have qualified for mortgages had their rent histories been considered. That may not seem like a lot, but it includes a large swath of Americans hurt most by discriminatory housing policies that stretch 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, the chief lending officer for OneUnited Bank, the biggest Black-owned bank in the U.S., told CBS MoneyWatch.
Fannie Mae is deliberately aiming to narrow the racial wealth gap, Fannie Mae CEO Hugh Frater said in a recent blog post. Census figures at the end of June showed about 45% of Black Americans owned homes in the second quarter, compared with 74% of white Americans. It's a disparity that's continued even amid a .
Yet a record of on-time rent payments can be an excellent creditworthiness indicator that someone will pay their mortgage on time, according to a recent study from the Urban Institute. Those who make their monthly mortgage payments on time for a year have a roughly 2.8% chance of defaulting including people with lower traditional credit scores, said Jun Zhu, co-author of the Urban Institute study and a clinical assistant professor at Indiana University-Bloomington.
"Right now, using the new Fannie Mae's system, [potential borrowers] have a second chance, And we show that their probability of default is actually very low. So this is really a good thing, to include the 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 turns up. Fannie Mae will only use the information if it bolsters creditworthiness and an individual's chances of being approved, according to their announcement in August. Prospective homeowners can re-apply if their credit score improves and not worry about a bad mark tied to a previous rent check.
"If you go through this process, and the results of looking at your rental history are not positive, it will not hurt your ability to qualify on a regular basis. They will not use it against you. And that's important for the consumer to know," OneUnited's Isaac said.
Shrinking the wealth gap
In all, about 45 million Americans have little or limited credit history. That makes it difficult to apply for a mortgage, a 2015 report from the Consumer Federal Protection Bureau found. Black and Hispanic applicants are more likely to have little or no history, contributing to the nation's massive wealth gap.
"Homeownership is a wealth builder, in the sense that you have an asset that over time does appreciate, that you can hold on to or you can pass on to a relative, or you can use it as a basis to make a move up," Isaac said. "Equity-building in a home allows the wealth gap — by substantial amounts — to shrink."
For Jenn Gummel, a real estate agent in Dover, Delaware, the rental income change can't come soon enough. Most first-time buyers she encounters ask if they can include rental history — and are surprised to learn they can't, she told CBS MoneyWatch.
"Almost every first-time buyer has said to me 'I really wish underwriting would take into account my rental payment history.' Now, that's not really what they say, but it's what they're trying to say," Gummel said in a video produced for her real estate clients on YouTube.
Gummel recalls a recent client from New York City whose mortgage application was rejected.
"They were paying an insane amount of rent in New York and their rent [in Delaware] dropped by a lot. If they would have been able to use their rental payment history, they probably would have been able to get a mortgage," Gummel said.
Fannie itself doesn't directly lend to borrowers. Rather, it buys mortgages from lenders including banks. Called Government Sponsored Entities, Fannie Mae and its cousin Freddie Mac were part of programs created in the decades following the Great Depression to spur home ownership and help build wealth. Mortgages held by the GSEs are guaranteed by the federal government to also help protect lenders from financial ruin.
The GSEs own more than 60% of all U.S. residential mortgages. So if Fannie Mae says a loan isn't a good risk, banks typically reject an application because they can't sell the resulting mortgage to Fannie.
Experian, TransUnion and Equifax
Evaluating these mortgages is tethered to credit scores like those used by the three big 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 typically 620. But anyone with a score of under 700 tends to be scrutinized closely, experts say.
Because the rental payment check is voluntary, consumers may want to hold off if their score is above roughly 700, both Urban Institute's Jun and Gummel said. That's because they're likely to be approved without it.
"Obviously, if they have a credit score of 760 or 700, I don't really think they're going to need [the check]," Gummel told CBS MoneyWatch. "It's really people that are maybe right below the bar or right above the bar. Just to give them a little boost."
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