This past September, Fannie Mae began accepting rent-payment histories through its Desktop Underwriter (DU) system. This is a good thing for a large group of potential homebuyers as their rental-housing payment history can now be included in their credit rating when they apply for a mortgage.
But the inclusion of rent payments into Fannie Mae’s DU system is only the tip of the iceberg. What about everyone who isn’t getting a mortgage through Fannie Mae or — for whatever reason — doesn’t qualify through the automated underwriting system?
Reporting up to two years of history can result in a boost of 25 to 50 points — and sometimes much more — for a renter’s credit score.
They aren’t out of luck. The inclusion of this rental data reported as a qualified trade line on their credit report makes it possible for renters to report and benefit from on-time payments at any time. Positive rent histories demonstrate good creditworthiness and usually result in a higher credit score.
As mortgage lenders and originators know, a higher score results in a greater chance of approval and a lower risk rating, thus leading to lower interest rates and fees. With a lower rate, the maximum loan size can increase. This combination means that a transaction can be completed more quickly and for a potentially larger amount. Lenders can start to see these benefits by incorporating education on rent-reporting services into their business.
Good for everyone
There are massive opportunities for multiple parties in the real estate and mortgage industries to leverage rental-payment histories. This group includes homebuyers, mortgage lenders, real estate agents and even landlords. Each one can benefit in unique ways.
Because rental payments create a qualified line of credit to their credit history, first-time homebuyers stand a better chance of being qualified for a mortgage (and paying less for it). In addition, this history will expand opportunities for other types of credit beyond a mortgage.
Mortgage lenders, too, benefit from including rent payments as they can get more people into homes with fewer delays. Buyers can qualify faster and with less hassle, thus reducing friction in the credit process. With quick and easy closings, buyers are happier with the mortgage process and are more likely to recommend you, the originator, to their friends and family.
Originators and processors will love the fact that there are no more mounds of paperwork, such as cancelled checks or months of bank statements, as they attempt to verify every single rent payment. The data will be reported directly from the credit bureaus just like other tier one tradelines. The result should be more loans closed for higher amounts and less hassle.
Real estate agents can market this program to renters, providing real-time value to these would-be buyers. This creates a stream of potential leads that could be ready to buy in only a few months. Having rental payments included in credit scoring before the mortgage application is submitted reduces the risk of rejection and provides Realtors with well-qualified, ready-to-buy clients.
Landlords appreciate the extra benefit their tenants get when rent-payment reporting is included in the process. They are assured that tenants are of higher quality and have greater likelihood of paying on time, since they’re more certain that these people have plans to leverage their positive payment histories. Plus, landlords who inform potential tenants that such a service exists can proclaim this as a differentiator when competing to attract new tenants.
How to report
Now, the credit bureaus don’t include payment history from just anyone. Renters can’t submit their housing-payment history without using a vetted data provider.
For a nominal monthly fee, these providers will confirm with landlords that payments are current. They may even report up to two years of history. This gives potential borrowers a long, solid line of credit that reporting bureaus can include in their credit-score calculations.
Using a vetted data provider to supply this information to the credit bureaus is key. Doing so embeds the rental-payment history into the fabric of the report, rather than as a supplement. As a result, the embedded tier one tradeline works to improve the overall credit profile and increase scores.
So, how should mortgage lenders and originators approach Fannie Mae’s decision, and rent reporting in general? Primarily through education.
Lending professionals should aim to inform their network of the changes, the impacts and how to take advantage of the opportunities that rent reporting presents. Here are several approaches to consider:
- Partner with a real estate agent or agency to host an educational seminar for renters, especially those looking to become first-time homebuyers. Craft a presentation that details the steps involved and be sure to include a section on how rent reporting can increase a credit score. Use examples, and highlight the differences in interest rates or fees when a credit score is boosted.
- Write a thought leadership article for your audience. Distribute it through your monthly email list or publish it in a local real estate market publication. Give examples using current rates and terms, like the option above, but be specific to your market demographic.
- Begin a relationship (or enhance your existing ones) with property management companies and landlords. Provide educational sessions to them on the benefits for their tenants. In addition, note that some rent-reporting companies offer affiliate programs and revenue-sharing opportunities, which can help the landlord’s bottom line.
In the end, rent reporting is a vast and untapped opportunity that offers many benefits. It can help more buyers get into homes sooner and at a lower cost. This is especially true for those without a credit profile, such as graduate students or recent immigrants. Mortgage lenders can offer bigger loans with less friction. And relationships between renters, landlords, agents and lenders can be improved.
Rent reporting has great potential as a marketing tool for promoting your business and assisting prospective homebuyers. It’s a win-win for the real estate and mortgage industries. ●