A new program from Fannie Mae—the government-based mortgage insurer—could make it easier for thousands of renters to get qualified to buy their own houses.
The agency says it has come up with a way to allow potentially thousands of renters to have their on-time payments reported every month to the three credit bureaus responsible for generating the scores that lenders use to determine eligibility and interest rates for mortgages. The program, first reported by USA Today, could be a game changer for renters who have been sidelined from buying their first homes due to spotty credit profiles.
Fannie Mae plans to address the issue by subsidizing the owners of multifamily properties, i.e., big landlords, to report monthly rent payments to the big three credit bureaus, thus boosting and in some cases creating credit scores for renters. Because the agency finances millions of multifamily units around the country, the plan would immediately make a large number of renters eligible to have their monthly rent payments count toward boosting their credit scores.
Besides saving money for a down payment, one of the biggest challenges for people who want to buy their first house is credit scoring, which uses data to assign a number that’s supposed to correlate with how responsible they are at paying their bills. But the formulas used to create those scores disadvantage first-time buyers in at least two ways. Most landlords don’t report rent payments to the credit bureaus, so even renters who are diligent about paying on time every month lose out on years’ worth of positive credit reporting for their greatest living expense.
The algorithms don’t just take payment history into account, but also the types of bills a person pays, with making regular mortgage payments giving a boost to credit profile compared with other types of debt. Because of that, a renter who faithfully pays off their credit cards every cycle and has never been late on a car payment is still locked out of having the maximum possible credit score because they lack a history of paying a mortgage. And that disadvantages many Black would-be homebuyers who on average bring lower credit scores and have less money saved for down payments when buying their first homes.
A study from the Urban Institute cited in the USA Today story found that Black households were twice as likely as whites to be renters and to have no credit score.