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 clarity and length.
Q: How much of a difference might the new Fannie Mae policy make for potential buyers?
Mayhew: The new Fannie Mae policy has the potential to remove significant hurdles to homeownership for a segment of would-be borrowers who have historically been overlooked by the traditional mortgage and banking system. Typically, when mortgage companies think of responsible use of credit, we like to see that a borrower has taken on various forms of debt and paid it back on time consistently over a period of several years.
However, some Americans don’t have the need or desire to borrow money, so they have what the mortgage industry calls a “shallow,” or a nonexistent, credit profile. Yet the absence of a full credit profile doesn’t necessarily make a borrower a greater credit risk. For instance, people in extremely rural areas often find less need for credit cards and auto loans, which would fill their credit report with the solid history of repayment that mortgage lenders look for. Likewise, some cultures and religions advise their members to avoid taking loans from banks. It’s well-known in the finance industry that certain cultural and religious groups shun traditional banking and prefer to engage in community lending, where people who need to borrow money get it from their neighbors in the community.
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 housing 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 simply 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 home-financing 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: Always make timely rent payments each month. 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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