According to the U.S. Census Bureau, people under the age of 35 make up the smallest demographic homeowners. There are a number of reasons this age group has struggled so much to catch up to older home owning generations — lower wages, larger student loan obligations, and negligible savings among them — but a lack of credit history may no longer be one of thing things holding them back, thanks to changes at mortgage lender Fannie Mae. Now, some borrowers may be able to use their history of on-time rental payments to qualify for a home loan.
So, what’s different about this?
Starting in September, Fannie Mae announced that they would change the automated loan underwriting system they use to evaluate a mortgage applicant’s credit, according to Tabitha Mazzara, director of operations at mortgage lender MBANC. “The way it works is that their automated system can now identify recurring rent payments from bank statements, as well as your credit score,” she says, adding that previously most lenders didn’t look at on-time rental payments as part of their underwriting process. https://9570d02275ff97ef2a64cb13bed82296.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
“Typically, lenders give a lot of weight to your credit score, which is based on your history of borrowing — things like credit cards, auto loans — and paying back,” she says. “But if you’ve been a person who’s avoided borrowing, and you have a ‘thin’ credit history, this change is an acknowledgement of the fact that it doesn’t necessarily mean you’re a risky borrower. This change enables them to take a wider view of someone’s finances.”
The changes will help those who previously wouldn’t have qualified for a loan.
The new Fannie Mae feature should help to remove some serious obstacles to homeownership for potential borrowers who have been overlooked by traditional mortgage systems, according to Andrea Puricelli, operations director of Inlanta Mortgage in Pewaukee, Wisconsin.
“It will help improve the number of borrowers as an acceptable credit risk and increase the number of prospective homebuyers who are approved under Fannie Mae’s guidelines through their Automated Underwriting Assessment engine,” she says. “This is a great opportunity for consumers currently paying rent on time from their checking accounts.” Unfortunately, for now, only borrowers approved for home loans through Fannie Mae will benefit from these changes.
This may make the path to homeownership easier for BIPOC buyers.
Mazzara says these changes are a step in the right direction when it comes towards making automated systems more inclusive of people who’ve been paying their rent responsibly, but don’t have a lot of credit history. “In this country, that is the case for a larger proportion of minority communities — homebuyers of color,” she says. In fact, a new report from The Mark Up suggests that automated underwriting algorithms can sometimes be skewed against BIPOC (Black, Indigenous, People of Color).
“Unfortunately, that lack of credit history can be an obstacle to homebuying, which is somewhat ironic — many people see it as fiscally responsible not to use credit cards or take out loans, or it’s just something that their cultural background encourages them to avoid,” Mazzara says. These changes at Fannie Mae might just be the thing to help offset some of that unintentional bias. Hopefully, the option will roll out to more lenders in the coming months.
If there is a home that you would like more information about, if you are considering selling a property, or if you have questions about the housing market in your neighborhood, please reach out. We’re here to help.