Fannie Mae Aims to Make Home Loans More Accessible

Mortgage finance giant Fannie Mae is making it easier to include rent-payment history as part of the mortgage approval process, a move intended to help borrowers with limited credit histories get better access to home loans.

Fannie Mae said that starting next month it will help lenders factor in borrowers’ history of rent payments when weighing those applicants’ qualifications.

Fannie Mae doesn’t require lenders to consider rent history, if a borrower has a credit report and score that meet the company’s criteria. But credit reports often don’t include residential-rent payments because most landlords don’t report the data to credit-reporting firms. Renters’ credit scores, which are based on information in their credit reports, as a result also don’t reflect that data.

The issue has been problematic for consumers with limited borrowing histories, who have difficulty getting approved for affordable credit.

“In some markets, it’s just as expensive to rent as it is to own,” said Hugh Frater, Fannie Mae’s chief executive. For many renters, “they have the history of making payments, which in my opinion should be equally and fairly considered in their ability to pay a mortgage.”

The changes to Fannie Mae’s underwriting system, which are scheduled to go into effect Sept. 18, will allow it to automatically identify rent payments from applicants’ bank-account information.

Twelve months of consistent rent payments could help applicants qualify for mortgages, but a history of missed or inconsistent payments wouldn’t penalize an applicant, Fannie Mae said.

Applicants would need to give permission for their bank-account information to be shared.

Fannie Mae doesn’t make loans directly. The company and Freddie Mac, the two government-controlled mortgage giants, buy loans from lenders and package them into securities that are sold to investors. Fannie Mae’s automated underwriting system tells lenders whether a loan would be eligible to sell to Fannie Mae.

Fannie Mae said the move to include rent payments isn’t about lowering the bar for credit approvals. Rather, consumers might not appear as financially responsible during the loan decision-making process as they would if rent payments were factored in.

In cases where a borrower doesn’t have a credit score, Fannie Mae already allows lenders to use rent history when assessing the borrower’s creditworthiness.

Fannie Mae and Freddie Mac are also considering allowing lenders to use other scores when evaluating mortgage applicants. Currently, lenders that use credit scores to underwrite mortgages have to use FICO scores, if they want to sell the loans to Fannie Mae or Freddie Mac.

Banks and other lenders are expanding the types of data they use for consumer loan decisions beyond credit scores and credit reports. Some of the largest U.S. banks are set to share data on customers’ deposit accounts in a pilot program to extend credit cards to people without traditional credit scores.

While the housing market has boomed in the past year, some first-time home buyers or buyers with limited cash have been left on the sidelines. The majority of mortgages originated in the second quarter went to borrowers with high credit scores above 760, according to the Federal Reserve Bank of New York.

For loan applicants who hadn’t owned a home in the past three years and whose applications weren’t approved by Fannie Mae’s system, 17% would have been, had rent payment history been considered, according to the company’s recent analysis.

The change could especially benefit Black and Hispanic borrowers, who tend to have lower credit scores than white borrowers and are likelier to have mortgage applications denied, said Laurie Goodman, founder of the Urban Institute’s Housing Finance Policy Center. Black and Hispanic households have lower homeownership rates than white households.

“This is a really important first step in updating the way we look at creditworthiness to better suit today’s borrowers,” Ms. Goodman said.

Bank-account data would reflect rent payments that are made via check or electronic-payment platforms but wouldn’t capture payments for applicants who pay their rent in cash.

“What we’re really going after is those qualified borrowers who are struggling because it’s more difficult for them to document that they are well-qualified,” said Tom Wind, executive vice president of consumer lending at U.S. Bancorp. It plans to use the new Fannie Mae process.

Collecting rental data has long been a challenging task for the credit-reporting firms in large part because it generally requires landlords to provide the payment data. Fewer than 5% of renters have their rent payments reported on their credit reports, Fannie Mae said. Some credit reports may include negative rental information, like when missed rent payments are referred to collections companies, without including consumers’ consistent rent payments.

Fannie Mae’s move to enable lenders to review rental payments through bank-account information potentially leapfrogs that issue.