Most Lenders Will Now Consider On-Time Rent Payments

MCLEAN, Va. – Americans with thin or no credit history may find it easier to qualify for a home loan. Fannie Mae and Freddie Mac back more than half of all U.S. mortgages, and Freddie just followed Fannie in announcing a system to allow on-time rent payments to be a consideration when applicants apply for a home loan.

According to Freddie Mac, less than 10% of renters currently see their on-time rental payment history reflected in their credit scores, inhibiting their ability to access credit or obtain competitive rates for a range of financial products. However, its new initiative “incentivizes rent reporting” using technology created by Esusu Financial Inc. Under its plan, the tech automatically transfers on-time rental payment data from property management software to the credit bureaus. It’s also programmed to automatically unenroll renters who miss payments, which Freddie says will prevent harming renters struggling financially.

“Rent payments are often the single largest monthly line item in a family’s budget, but paying your rent on time does not show up in a credit report like a mortgage payment,” says Michael DeVito, CEO of Freddie Mac. “That puts the 44 million households who rent at a significant disadvantage when they seek financing for a home, a car, or even an education. While there remains more to do, this is a meaningful step in addressing an age-old problem.”

To entice multifamily owners to submit rental data, Freddie Mac will give them closing cost credits on multifamily loans if they agree to report on-time rental payments through Esusu’s platform, which manages the process of reporting to all three major credit bureaus and ensures compliance with industry standards.

Freddie says multifamily owners’ “administrative and compliance burden” has made rental data difficult to collect so far.

“At present, the most common way for rents to be reported to the credit bureaus is when there is a missed payment that has gone to a collections agency,” says Alexis Sofyanos, senior director of Equity in Multifamily Housing at Freddie Mac. “Freddie Mac wants to flip that script so that renters who pay their rent on time and in full each month get credit for doing so, while also putting in safeguards for the most vulnerable.” 

Freddie Mac vs. Fannie Mae systems

Together, the two mortgage giants back about 60% of all U.S. mortgage loans.

In August, Fannie Mae announced its own system for including credit scores in mortgage lending decisions. “It seems obvious that if someone is paying rent consistently, it’s likely they could and would pay their mortgage consistently, too,” said Fannie Mae CEO Hugh Frater at the time.

But new technology is allowing Fannie Mae to check rent payment histories electronically through bank statements, with the borrower’s permission. The new policy went into effect on Sept. 18. Under this system, Fannie says it will turn to the originating lender after a negative loan decision and ask if a one-year history of on-time rental payments might help. The lender will then ask the borrower to approve a check of their bank account.

Regardless of the system, the rent-check option is expected to open homeownership to more people, notably those in protected classes under the Fair Housing Act. In a sampling of mortgage applicants denied a loan over the past three years, Fannie Mae found that about 17% of those applicants would have been approved had their rent-payment history been included in the loan analysis, according to an analysis by the Urban Institute.

Fannie Mae and Freddie Mac are not direct mortgage lenders. Called government-sponsored enterprises (GSEs), they buy mortgages from lenders. It keeps the U.S. mortgage market moving because once sold to the GSEs, lenders can use the money to fund yet more mortgage loans.