Owning a home is the American dream, but many renters who would like to become homeowners can’t get mortgages due to insufficient credit histories. Even if they have jobs and pay their rent on time, they may not qualify because most landlords don’t report rent payments to the credit bureaus.

Fannie Mae, a leading source of mortgage financing in the U.S. for single-family home buyers, is adding a new feature to its Desktop Underwriter, its automated underwriting program. As of September 18, Fannie Mae will consider rental payment history—with permission from the mortgage applicants—as part of its risk assessment for loan approval.

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“Many renters believe they will never be able to buy their own home because of insufficient credit,” said Hugh Frater, Fannie Mae’s chief executive officer. “We can responsibly expand mortgage eligibility by including positive rent payment history in underwriting risk assessments.”

With the new program, Fannie Mae’s Desktop Underwriter will enable some renters to get credit for paying their rent on time.

Mitria Wilson-Spotser, director of housing policy at the Consumer Federation of America, sees this as “a critically important move” for expanding access to mortgage credit. “Because rent is the single largest monthly payment for many households, timely payment should absolutely be included in underwriting calculations,” Wilson-Spotser said.

The nation’s realtors also support the new option. The ability to consider rental payments when gauging financial responsibility in real time “will enlarge the eligible qualifiers of mortgages and, consequently, homeownership opportunities,” said Lawrence Yun, chief economist at the National Association of Realtors. “Moreover, the new method can incentivize renters to consistently pay rents on time, further helping the housing market.”

The Nuts and Bolts

When a potential homebuyer applies for a mortgage, the lender typically sends that loan application to Fannie Mae or Freddie Mac to see if it will be eligible to sell to them. Lenders generally approve loans that Fannie or Freddie would buy.

(Most lenders don’t want to hold loans for 30 years, so they sell them to Fannie or Freddie. These government-chartered companies sell the loans they buy to investors. This marketplace makes the 30-year mortgage possible.)

Under the new program, if the loan application is sent to Fannie Mae, and the Desktop Underwriter’s algorithms determine the loan does not qualify for purchase as submitted, but might qualify if the borrower could provide a 12-month record of on-time rental payments, Fannie Mae will contact the lender. The lender can then ask the borrower if they want to give Fannie Mae permission to access their bank statements and reconsider their eligibility.

Only consistent rent payments will be considered. If any missed payments are discovered, that will not negatively affect the applicant’s ability to qualify for the loan, Fannie Mae said.

Bruce McClary, vice president for communications at the National Foundation for Credit Counseling, believes the new underwriting option could help people with what’s called a “thin credit file.” Because they have little or no credit history, the lender cannot generate a credit score.

“Looking at somebody's rent history is another opportunity to gauge their creditworthiness by the pattern of payments—whether they're paying on time, and whether they can be consistent—and this is not something that's picked up by traditional credit reporting in scoring models,” McClary told Checkbook.

Fannie Mae’s new program could also provide a second chance for people who’ve faced financial challenges during the pandemic, such as missed mortgage payments. If they’re now renting and making their rental payments on time, they might be able to qualify for a mortgage again.

Fannie Mae recently sampled mortgage applications from people who had not owned a home in the past three years, and were found to be ineligible by the Desktop Underwriter. It turns out that in 17 percent of those cases, the application could have been approved if rental payment history had been considered.

“For a lot of the people who were affected by the housing crisis, this is the best news ever in terms of being able to have another way to get back to homeownership for those who want to.” McClary said.

The NFCC’s Envisioning Home Ownership program helps first-time homebuyers with the critical pre-purchase coaching support they may need to buy houses. Those who take part in this program work with dedicated homeownership coaches.

It’s Going to Take Time

The Urban Institute, a non-profit research organization, analyzed Fannie Mae’s decision to incorporate rental payment history into the application process, and called it an “historic” change that will “open the doors to homeownership for many buyers who previously would have been locked out.”

It will take time for mortgage originators across the country to get up to speed. But as this new program becomes widely available, “we expect this shift to disproportionately benefit Black and Latino borrowers, who, in part because of structural racism, tend to have lower credit scores than white borrowers,” the study authors noted in a blog post.

Homeownership is not only the American dream; it can also be cheaper (in some metropolitan areas) than renting a house.

“As rents continue to hit new highs and mortgage rates remain low, buying a starter home now costs less per month than renting a similar-sized unit in 24 of the 50 largest U.S. metros,” according to the July Rental Report from Realtor.com. The top markets where it's more affordable to buy a starter home versus rent one include Birmingham (33.1 percent lower), St. Louis (29.4 percent lower), Pittsburgh (27.7 percent lower), Orlando (25.9 percent lower), and Cleveland (25.7 percent lower).

“While this is good news for first-time buyers in these metros, there are plenty of other factors to consider when deciding whether to become a homeowner, including making sure it's the right time for you and your family,” said Danielle Hale, chief economist at Realtor.com. “But if the monthly costs have been holding you back, data suggests it's worth exploring in many markets, and although it's still hard to find entry-level homes, we are seeing more smaller homes coming on the market."