Helping Renters Unlock the Door to Homeownership
Owning a home has long been one of the most effective ways to build wealth. But for many lower-income renters – especially for Black families and other people of color – the leap from renting to owning can seem nearly impossible. For many, one of the biggest obstacles to qualifying for a mortgage is insufficient credit history.
Today, Fannie Mae is taking an important step forward to change that.
We are making a groundbreaking update to our automated mortgage underwriting system, Desktop Underwriter®, to allow lenders to consider a history of recurring rent payments in assessing eligibility. It seems obvious that if someone is paying rent consistently it’s likely they could and would pay their mortgage consistently, too. Yet we believe this will be the first time any large-scale automated mortgage underwriting system will leverage electronic bank statement data to consider positive rent payment history.
This is one important step in correcting housing inequities and encouraging the housing system to develop new ways to serve all of society safely and fairly. While credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, building credit in the United States is not an equitable endeavor. Most ways to establish credit involve student loans, credit cards, or parental co-signers. But, people of color are statistically less likely to use these forms of credit to manage their financial lives.
As a result, people of color are disproportionately represented among the 20% of the U.S. population having little to no established credit history. Our 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 than white consumers (29% to 18%).
“For many households, rent is the single largest monthly expense. There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations. With this update, Fannie Mae is taking another step toward understanding how rental payments can more broadly be included in a credit assessment, providing an additional opportunity for renters to achieve the dream of sustainable homeownership.” – FHFA Acting Director Sandra L. Thompson
We decided to tackle this challenge through the lens of innovation. Starting September 18, Fannie Mae will enable lenders, with the borrower’s permission, to use bank account data to identify 12 months of consistent rent payments. This technology innovation is a “win-win” for renters looking to own a home. That is, there is no way it can hurt their credit score, and it will only be used to help eligible homebuyers qualify for mortgage credit. Any records of missed or inconsistent rent payments identified in the bank account data (and not already reflected on the applicant’s credit report) won’t negatively affect their ability to qualify.
What could this change mean? In a recent sample of applicants who had not owned a home in the past three years and did not receive a favorable recommendation through Desktop Underwriter, 17% could have received an Approve/Eligible recommendation if their rental payment history had been considered. We will do all we can to help lenders and consumers take advantage of this positive change to DU.
Today, the rate of Black homeownership is roughly 30 percentage points lower than for white households, which translates to almost 4.7 million fewer homeowners. This gap has stood firm since the early 1900s, and it stems in part from historically racist government policies that disadvantaged Black Americans and stymied their ability to build wealth and economic stability. It has been estimated that if homeownership rates were the same for all races, the wealth gap between Black and white families would be reduced by 31 percent.
Fannie Mae is committed to doing all that we can to address these inequities. This change demonstrates the potential of using technology and data to remove systemic barriers to mortgage finance. It is one step toward creating a better, fairer housing market for everyone.
Hugh R. Frater
CEO, Fannie Mae
August 11, 2021