If someone can pay their rent month after month, why can’t they make a mortgage payment? For years, most renters didn’t get credit for timely rental payments. Last year, however, two of the government-sponsored enterprises (GSEs) did something about it.
Fannie Mae launched a program in September 2021 to identify recurring rent payments in a mortgage applicant’s bank statements. The company’s Desktop Underwriter program factors these payments into the underwriting of a loan. Meanwhile, Freddie Mac took a different tact. In November 2021, the company announced that it would provide closing-cost credits for multifamily housing loans to encourage rental-property owners who report their tenants’ on-time payments.
The results for both programs look promising. As of March 2022, Fannie Mae had received 1,000 loan applications that leveraged rent-payment history in determining mortgage credit eligibility, says Cyndi Danko, Fannie Mae’s senior vice president and single-family chief credit officer. This program is the “starting point, not the finishing line,” Danko writes in an email.
So far, we’ve helped establish credit scores for more than 13,000 individuals who were previously credit invisible.
—Lauren Garren, vice president and chief business officer, Freddie Mac Multifamily
“We’re at the beginning of a journey to ensure that more of a homebuyer’s payment history is considered for mortgage qualification, including monthly rent,” Danko says. “This is one step in a series of efforts we’re taking to help expand sustainable homeownership opportunities for underserved populations and support a more equitable housing-finance system.”
Guild Mortgage executive David Battany praises the program and points to data from the National Association of Realtors which shows that first-time homebuyers made up 30% of the market this past March and 29% in February. Battany says it’s critical to go beyond FICO scores and debt-to-income ratios to determine risk for many of these buyers.
Battany argues that lowering the bar for these borrowers — like what happened in 2008 — is counterproductive. He says that Fannie’s program, which looks at income and expense data, is an accurate reflection of borrower risk.
“If you’ve been paying rent of $2,000 for three years in a row without one late payment, and now you’re paying a mortgage with a (principal and interest) of $2,000, it’s very powerful, because they’ve shown the ability to pay a very similar expense consistently,” Battany says.
For its program, Freddie Mac is working with Esusu Financial to provide data to the three major credit-reporting bureaus. Esusu charges property owners a fee with a discount negotiated by the GSE. It will automatically unenroll renters when missed payments occur, preventing harm to those who struggle financially.
The early results have been encouraging, says Lauren Garren, vice president and chief business officer for Freddie Mac Multifamily. As of this past February, more than 43,000 tenant households across 450 properties were enrolled in the program, Garren writes in an email.
“So far, we’ve helped establish credit scores for more than 13,000 individuals who were previously credit invisible,” Garren says. “Participants with existing credit scores, who saw an improvement in their score, improved their scores by an average of 43 points.”
There’s an advantage to the Freddie Mac approach compared with the Fannie Mae way, Garren says. Fannie Mae uses on-time rental payments only for the home-purchase loan application process. By getting apartment owners to record on-time payments, however, this will boost renters’ credit scores over time.
“As a result, they may see benefits not just in the homebuying process but also in other areas where an improved credit score is advantageous,” Garren says.
There’s a growing recognition that reported rent payments could make a big difference in credit scores for renters, says Maitri Johnson, vice president of tenant and employment screening at TransUnion, one of the three major credit bureaus. Earlier this year, TransUnion studied this issue through surveys of 350 multifamily executives and 2,039 renters.
Property managers were asked why they choose or choose not to report rent payments to the credit agencies. The top reason cited is to help tenants build credit (80%). They also want to encourage their residents to pay on time (71%) and to attract residents who are financially responsible (49%). The reasons against reporting are that it’s too time-consuming (22%), landlords don’t know how to do it (21%), and that it’s too much work or there’s no obvious benefit (20%).
The study found that half of renters were aware that rent payments can be reported and, to some degree, want their scores reported to the credit bureaus. This share goes up to 60% when looking solely at Generation Z renters.
“It’s actually become part of the national conversation now with Freddie and Fannie, and certainly other agencies that are also looking at this,” Johnson says. “That is really what’s driving a lot of this awareness.” ●