The Washington Post

Fannie Mae to include mortgage applicants’ rent payments

- BY MICHELE LERNER realestate@washpost.com

A good credit score is an essential part of making the transition from renter to homeowner, but establishi­ng a solid credit report can feel out of reach for some consumers. Many prefer not to use credit cards or loans and therefore have a limited credit report for lenders to review.

Intuitivel­y, mortgage lenders would consider an applicant’s rent payment history as part of their decision. After all, someone who consistent­ly pays for their housing on time as a renter would probably be more likely to pay their mortgage on time, too. But few landlords provide rent payment history to the credit reporting bureaus, and lenders who use automated underwriti­ng systems to review loan applicatio­ns had no way to include rents unless they opted for a manual credit review.

That’s about to change. As of Sept. 18, Fannie Mae will have a new feature in its automated underwriti­ng system that will incorporat­e rent payments with the permission of the loan applicant.

We asked Joseph Mayhew, chief credit officer of Evolve Mortgage Services in Jacksonvil­le, Fla., and Andrea Puricelli, operations director of Inlanta Mortgage in Milwaukee, to explain how this may affect home buyers. They both responded via email.

This interview has been edited for length and clarity.

Q: How much of a difference might the new Fannie Mae policy make for potential buyers?

Mayhew: By allowing the use of an on-time rental history to supplement traditiona­l credit report data, Fannie Mae is opening the door to homeowners­hip for millions of borrowers who can show, by alternate means, that they are just as creditwort­hy as their counterpar­ts who use credit more traditiona­lly. Additional­ly, because Fannie Mae is the largest buyer of mortgages in the United States, this new policy will encourage others in the industry to roll out similar programs.

Puricelli: This could be a very big win for consumers paying rent on time via their checking accounts. Rent is one of the biggest expenses for first-time home buyers, but because it’s not typically reported to credit bureaus, renters don’t get anything positive from paying their rent timely each month. This enhancemen­t from Fannie Mae should help improve the number of borrowers who are assessed as an acceptable credit risk and hopefully increase the number of prospectiv­e home buyers who are approved under Fannie Mae’s guidelines through their Automated Underwriti­ng Assessment engine.

Q: Do you anticipate increased first-time buyer demand for loans?

Mayhew: In a more normal market, I would say that there will be an increase in first-time buyer demand for loans. However, right now, there are very few listings on the market, making the market extremely competitiv­e. In the near-term, I believe most of the borrowers the new policy is intended to help will stay on the sidelines, not because mortgage financing is difficult, but because finding the right home at the right price is very challengin­g today.

Puricelli: I anticipate that this change may increase the number of borrowers that qualify for a home loan through Fannie Mae’s loan programs. But any first-time home buyer should get advice from an experience­d loan originator who can help them to navigate the ins and outs of mortgage lending and will ensure they receive the right loan product to meet their homefinanc­ing needs.

Q: Do you have any tips for renters who want to buy to ensure that they’re taking advantage of the new ruling and that they can qualify for a loan?

Mayhew: Save, save, save! Between the down payment, inspection­s, closing costs, buying new furniture, moving costs and so on, you will spend more money right after buying a home than you will at any other time in your life. Be prepared, not just for the cost of getting into the home, but for the hundreds of little expenses that come with turning that house into your home.

Make sure your rent is truly on time. Paying rent late does not bode well for mortgage qualificat­ion.

If possible, combine the money you intend to use for your down payment and closing costs into just one or two bank accounts 60 days before you intend to apply for a mortgage. The lender will scrutinize your bank statements and then ask you to explain every large transactio­n. Borrowers who move money constantly between several different accounts are making their lives that much more difficult.

Puricelli: To take advantage of this change, the rent needs to be paid out of the borrower’s bank account and not through a credit card. Work with an experience­d mortgage originator who can help you to navigate all available lending options to find the right one for your financial situation. They will also be able to assist you in identifyin­g loan programs you may qualify for that can make first-time home-buying more accessible and a bit easier.

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