Rent payments and credit scores: What’s the deal?

Q: We’re both renters and savers. We pay our rent and have good savings. We want to purchase our first home and got copies of our credit reports before speaking with lenders. Surprise! The reports have information regarding credit card use but say nothing about our rental payments, payments that should be a big plus in our situation. What can we do?

A: Renters routinely get the short end of the financial stick when it comes to credit reports. “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 underwriting calculations,” says Sandra L. Thompson, acting director of the Federal Housing Finance Agency (FHFA).

The tenant credit crunch reflects several potential problems. Some tenants may have insufficient information or not enough recent data to create a credit score. These are “unscorables” with so-called thin files. There are also credit “invisibles,” individuals for whom credit reporting agencies (CRAs) have no information.

Michael Turner, president of the Policy and Economic Research Council (PERC), explains that “53 million people in the U.S. have sparse or no credit history which can lead to a credit Catch-22 — in order to qualify for credit, you must already have credit.”

The problem for tenants is that few landlords — fewer than 5% according to Fannie Mae — report monthly rental payments to credit reporting agencies.

The lack of landlord credit reporting is a big hurdle for tenants. Importantly, the lack of tenant payment reports is also a problem for landlords. A 2019 study by TransUnion found that when rent payments are shared with credit reporting agencies, 73% of all renters would be more likely to make timely payments and 67% said they would prefer to rent from landlords who reported monthly payments.

There are services tenants can pay to assure that monthly rental payments are included in credit reports. However, why should tenants have such a cost when those with credit cards or who finance a car do not?

A solution has now been developed by Fannie Mae. The way it works is that a mortgage applicant gives Fannie Mae the right to electronically check bank records. Fannie Mae can then independently see recurring payments for the past 12 months, including rent payments. Such payments can be used to support mortgage applications.

But what if a payment was missed or late?

“Only consistent rent payments,” says Fannie Mae, “will be considered to improve eligibility. Any records of missed or inconsistent rent payments identified in the bank statement data will not negatively affect the applicant’s ability to qualify for a loan sold to Fannie Mae.”

In effect, tenants can now get the credit benefit they deserve when applying for a mortgage — even if landlords do not report monthly payments to credit reporting agencies. Speak with local mortgage loan officers for details.

But what about the “unbanked,” those without checking or savings accounts? The Fannie Mae program provides another reason why opening a bank account can be good for credit purposes as well as convenience.