With homes for sale in short supply and prices climbing higher and higher, becoming a first-time homebuyer is tough enough as it is.
But if you have a limited credit history, many lenders will use that fact to charge you a higher interest rate on your mortgage — so your foray into the housing market will feel like it’s over before you've even had a chance to be outbid on your first 20 homes.
Now, one of the country’s biggest mortgage players wants to change that, by rewarding responsible renters with expanded access to affordable mortgage loans.
Paying your rent every month may not feel like it’s getting you any closer to being a homeowner. But in just over a month, that might actually be the case.
Pay your rent, boost your chances of getting a mortgage
Government-sponsored mortgage giant Fannie Mae has announced that the underwriting system used by its lending partners will begin factoring on-time rent payments into its evaluation of borrowers' creditworthiness as of Sept. 18.
Single-family lenders who receive permission from mortgage applicants will be able to identify recurring rent payments in their bank statement data. Rent payments can be flagged if they're made either electronically or by check and appear in a borrower’s payment history.
“For qualified renters who may have limited credit history but a strong rent payment history, Fannie Mae’s [underwriting] enhancement creates new opportunities for homeownership while promoting safe and sound lending,” Fannie says in a statement.
Fannie Mae doesn’t originate mortgages itself, but because it purchases and guarantees loans for much of the American mortgage market, it has considerable influence over industry standards and practices.
Tom Wind, executive vice president of consumer lending for U.S. Bank, says incorporating rent payment data will allow his company to "expand sustainable homeownership opportunities for underserved markets and consumers."
If you happen to be behind on your rent right now because of the pandemic, be aware that billions in emergency rental assistance is still available at the state and local levels, thanks to the COVID stimulus bill President Joe Biden signed in March.
Why Fannie's move should help homebuyers
Despite consistent rent payments being considered a relatively reliable indicator of trustworthiness and financial stability, fewer than 5% of renters see their rent history reported on their credit reports, Fannie Mae says.
That often leads to borrowers having much shorter credit histories, something that works against them when they apply for mortgages. When you don't have an established track record as a borrower, lenders have little evidence of your ability to repay creditors — and little incentive to offer you a favorable mortgage rate.
Adding 12 prime examples of responsible behavior to your credit history every year — that is, monthly rent payments — could change that.
According to Fannie Mae’s own research, lenders factoring in first-time homebuyers' histories of consistent rent payments in the past would have resulted in more borrowers qualifying for mortgages.
“In a recent sample of mortgage applicants who had not owned a home in the past three years and did not receive a favorable recommendation through [underwriting], 17% could have received an 'Approve/Eligible' recommendation if their rental payment history had been considered," the company says.
Only consistently on-time rent payments will be factored into your evaluation as a borrower. Missed payments will not have a similarly negative effect, Fannie Mae says in a news release.
Other ways to improve your homebuying odds
If you’re a responsible renter with a short credit history, Fannie Mae's decision to help lenders take your rent payments into consideration could be huge. But there’s more you can do to make a good impression.
Your rent payment history still won't play a role in how your credit score is calculated after Sept. 18. Even if your rent is always paid on time, your score won't necessarily be is as high as lenders want it to be.
If you haven't seen your score in a while, it's easy today to check your credit score for free. The lowest mortgage rates tend to go to borrowers with the highest credit scores; you might find yours needs a little improvement before you apply for a mortgage.
Maybe you’re paying your rent on time, but at the expense of your other debts. If you have multiple high-interest debts you’re having trouble paying, consider rolling them into a lower-interest debt consolidation loan. You’ll pay less in interest, wipe out your debt sooner and improve your cash flow.
Don't apply for a mortgage with the very first lender who makes you an offer. Instead, compare offers from at least five lenders to find the best rate for your area and for a person with your credit profile.
And, if saving up your down payment is your biggest homebuying hurdle, try generating some extra income. A popular app can help you earn returns in the still-hot stock market using little more than the "spare change" from your everyday purchases.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.