Fannie Mae recently announced that it will begin to include rental history as part of its mortgage credit evaluation process, beginning September 18, 2021.
This decision will likely bring a large number of creditworthy renters into the homebuying market, according to Fannie Mae.
What is Fannie Mae?
Fannie Mae, or The Federal National Mortgage Association, is a US government-sponsored enterprise that buys home loans from lenders and packages them as mortgage-backed securities. It was founded in 1938 during the Great Depression as part of an effort to increase homeownership rates and affordable housing, reduce funding costs for lenders, and increase liquidity in the secondary mortgage market. Essentially, they set the safe standard for creditworthiness that banks can rely on to sell/liquidate their mortgages and continue lending new money to their communities.
Why is Fannie Mae doing this Now?
I think we will all agree that this move has been a long time coming. How many times have you seen or heard stories similar to, “I wasn’t approved for a mortgage because I don’t have the credit history, so now, instead of paying a $1,200 mortgage, I have to continue renting for a fourth year at $1,500 per month.” Even more important than common-sense reasoning, Fannie Mae is changing its policy due to the overwhelming body of evidence that suggests its previous policy was only enabling or perpetuating systemic racism.
Credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, but fewer than 5% of renters today have their rent payments reported on their credit bureau report, putting many prospective first-time homebuyers at a disadvantage. Approximately 20% of the U.S. population overall has little established credit history – a group in which Black and Hispanic consumers are disproportionately represented. Additionally, Fannie Mae’s National Housing Survey® found that Black consumers identify insufficient credit score or credit history as their single biggest obstacle to getting a mortgage and do so at a much higher rate compared to white consumers (29% to 18%).Fannie Mae Press Release
How will this new policy actually be put into action?
Fannie Mae’s software product, “Desktop Underwriter,” will electronically comb (with an applicant’s permission) their bank account records to define any recurring payments that will be indicative of regular, consistent rent payments. Only consistent rent payments will be considered to improve eligibility for a home loan. 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, but obviously will not help either. This additional rental payment data will provide a more inclusive mortgage credit evaluation process and create new opportunities for homeownership while promoting safe and sound lending.
What does this mean for homebuyers and sellers?
It is likely that many new homebuyers will enter the market and push prices higher as this new credit evaluation process begins. Many leases are signed for extended periods of time, generally a year or longer, so it is unlikely to have a large immediate effect. It may, however, have a large effect on next year’s spring and summer markets in our local area as many of the leases in our communities run from August to August or September to September. As those lease terms come to a close, many renters will be preparing to leave their leases in favor of a home purchase.