First-time homebuyers looking to move from paying rent to owning a home can benefit from Fannie Mae’s new underwriting program, which allows lenders to keep track of rental history.
Fannie Mae is a private but government-backed organization that supports mortgage loans that lenders make and resell to investors.
While credit bureaus and scoring companies are starting to include rent and utility bills in consumer credit histories, factors traditionally not considered by Fannie Mae or its subsidiary Freddie Mac. Both organizations, which support many US mortgages, instead use older versions of the FICO credit rating system, which does not account for rent and utility bills, helping lenders guarantee mortgages.
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How will these new rules change mortgage underwriting?
Beginning September 18, 2021, lenders working with Fannie Mae on mortgages can use a new feature in Fannie Mae Desktop Underwriting, which includes rent payments in the mortgage applicant’s loan appraisal process.
Typically, the lender takes into account the credit report as well as the FICO score when assessing whether an applicant is eligible for a loan. “With this new feature, Fannie Mae can tell the loan officer if a borrower can benefit from a rent revision,” said Fannie Mae spokesman Rachel O’Grady.
Credit history is an important way to assess the homebuyer’s ability to pay the mortgage payment, but in the long term first-time home buyers O’Grady says they are at a disadvantage if there is no rent on their credit reports. “According to Fannie Mae’s first-time homebuyer study, lenders considering their fixed rent payments may be the difference between qualifying and not eligible for a mortgage.”
Ron Haney, senior vice president of home finance policy for the independent bankers community of America, agrees that the history of rent payments is a good indicator of the likelihood of mortgage payments.
“Lenders have always tried to get a rental certificate from the consumer’s landlord. While they were helpful in the underwriting process, most of these written references were not detailed and there was no way to be sure they were even accurate, ”Haney says. “What sets Fannie Mae’s new product apart is that they use 12 months of actual payments from the consumer’s bank account to verify that the rent is paid on time.”
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How can you get a rent review?
Fannie Mae will notify lenders of rent review options when reviewing applications, but it’s also a good idea to ask if your lender is participating in the program when you apply for a mortgage.
“The lenders Fannie Mae spoke to about this were thrilled to help underserved borrowers,” says O’Grady. “If lenders accept this new feature, we expect other industry players to follow, allowing more eligible new home buyers to qualify for regular mortgages.”
To obtain the right, borrowers need:
– Be the first home buyer, which means you have not had a home in the last three years.
– Meet Fannie Mae requirements, which include a FICO score of at least 620 for fixed rate mortgages; acceptable down payment (at least 3%, depending on the loan product); and an adequate debt-to-income ratio.
– Post lease payments for 12 months, which can be identified in the payment history in the bank account. Only positive history of payments is taken into account – not missed or overdue.
Leveraging rent data “should help many first-time homebuyers as rent payments are probably the largest monthly consumer spending,” Haney says.
Fannie Mae has no plans to include additional payment history, such as utility bills.
“We believe this improvement is an important first step towards ensuring that tenants can get good credit based on timely rent payments, and will help create a better and fairer housing market for all,” says O’Grady.