Rental rates are soaring. For the first six months of the year they increased 11.4%, according to the “Apartment List National Rent Report” . That’s great news for real estate investors, but for tenants the story is different. Monthly housing costs for loan qualification purposes are treated differently, depending on whether you’re a homeowner, real estate investor, or renter.
- Lenders can readily check monthly mortgage payments when homeowners apply to finance or refinance a property. Such information is on credit reports, plainly showing timely payments, late payments, and no payments. Credit scores — which are based on credit report data — go up when property owners make full and timely payments, and down when they don’t.
- Real estate investors go through a different process when financing and refinancing. Lenders look at leases and tax returns to check rental income. But, lenders typically count only 75% of gross income. The reason for the reduction is that lenders want a quick way to account for such costs as repairs, taxes, and vacancies even though tax returns show the actual numbers.
- And tenants? Pay your rent in full and on time, and such good financial behavior is unlikely to show up in credit reports. Rental payments cannot boost a tenant’s credit score in most cases because only about 5% of all rental information is captured by credit reports.
The system is not just difficult for tenants, it’s also difficult for lenders and real estate investors.
Lenders can ask for canceled checks, but a lot of tenants pay cash. They’re among the unbanked, and that status makes it difficult to become tenant or a first-time buyer, even if the individual is entirely creditworthy. While it might seem surprising that anyone can pay for anything today without an electronic trail, a 2017 study by the Federal Deposit Insurance Corporation estimated that there were 14.1 million unbanked adults, individuals without checking or savings accounts.
The situation is especially difficult for minority tenants.
“Approximately 20% of the U.S. population overall,” said Fannie Mae, “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%).”
The Fannie Mae Work-Around
Now things are about to change. Fannie Mae says it will buy loans from lenders even when rental payments have not been included in credit reports. And the more people who can qualify for mortgage financing, the better for real estate investors and other sellers.
How is this possible?
Rather than having lenders look through a pile of canceled checks, the Fannie Mae system is based on bank records. With your permission, lenders can electronically access your bank records and check for rental payments.
Under the new system, says the company, “only consistent rent payments will be considered to improve eligibility. 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.”
In other words, if you as a tenant have a good history of rental payments, it will help you qualify for a mortgage. However, if your payment history has gaps, then you will not be penalized. So, heads you win, tails you win.
“Rent payments,” says Fannie Mae, “that appear in the payment history of the borrower’s bank account data can be identified, whether made via check or electronically, such as via a company’s payment portal or other digital payment solution.”
“The real attraction of the new Fannie Mae system is that it does not rely on credit reports,” said Rick Sharga, Executive Vice President with RealtyTrac, “This is important because tenants with solid payment records have not been getting the credit benefit available to homeowners with similar costs and payment histories.”
The Fannie Mae initiative will plainly help a lot of renters with an interest in homeownership. As well, it’s likely that Freddie Mac will adopt a similar program, meaning that rent will finally “count” for most banked tenants seeking a mortgage.
Direct access to bank records has become increasingly common. Allow credit reporting agencies access to your bank account and you may get a higher score. Allow lenders see to your bank account and you may get a lower interest rate. Most likely, an increasing variety of financial players will want direct access to your bank information – and no doubt they will get it.