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By Jeff Keleher on 8/20/2021Tags: buying a homemortgage basics

If buying a house was easy, everyone would do it. Mortgage lending levels the playing field somewhat, allowing people to purchase homes without covering the entire sale price at closing. But there’s no denying that the loan application process can be a barrier in and of itself, requiring borrowers to submit to a series of rigorous financial reviews.

Meeting the eligibility requirements for a home loan can be difficult for people who lack a lengthy, documented credit history. That doesn’t mean these folks can’t afford to buy a house — simply that they may not qualify for a conventional mortgage.

Fannie Mae recently announced an update to its automated mortgage underwriting system to help more people qualify for an FNMA-backed loan. How so? By weighing an applicant’s history of recurring rent payments as part of their eligibility.

It’s not hyperbole to say that this is a gamechanger for the mortgage lending industry. Let’s take a look at what this incredible development means for prospective homeowners across the country.

Introducing FNMA’s updated underwriting system

Fannie Mae’s automated underwriting system allows approved lenders to rapidly check loan applicants’ qualifications, massively streamlining the loan approval process. The latest change to FNMA’s underwriting system focuses on an essential living expense that somehow often goes ignored when reviewing a borrower’s financial situation: paying rent.

When running credit checks, Fannie Mae’s automated underwriting system, Desktop Underwriter, can incorporate recurring rent payments into its assessment of a loan application. That’s right, Fannie Mae now has the ability to weigh rent alongside other standard criteria like credit history and debt-to-income ratio when considering a borrower’s eligibility.

Although the underwriting system itself is automated, the process to factor in rent payment history still involves some manual steps — at least for the time being.

HOW FANNIE MAE CHECKS RENT PAYMENT HISTORY 

1. When Desktop Underwriter encounters an ineligible loan application from first-time homebuyers, it will check the applicant’s rent payment history.
2. If the prospective borrower has an unblemished track record over the previous 12 months, the system will then reassess the application to see if this new insight impacts loan eligibility.
3. Once Desktop Underwriter has confirmed that the loan would be eligible due to rental payment history, it will inform the lender of these results.
4. The borrower can then give Fannie Mae permission to review their bank statements in more detail to verify their rent payments, which is conducted by an FNMA-approved vendor.
5. After all information has been confirmed, Desktop Underwriter will reverse its eligibility decision and OK the loan.

As you probably noticed, neither the borrower nor the lender can request that rent payment be factored into the system’s review process. As a weighing factor, it only comes into play under select circumstances, and then requires a third-party vendor to conduct additional assessments.

Some might see this as an incremental step, but it’s actually a giant leap forward. Historically, credit bureaus have rarely included on-time rent payments in their credit reports at all. By making this landmark change to its underwriting system, the government-sponsored enterprise can capture a more complete and accurate view of an applicant’s financial situation. And that’s great news for everyone.

Addressing inequities in the mortgage approval process

Why is this update such a momentous occasion for the mortgage lending community? Simply put, it helps level the playing field for loan applicants and will undoubtedly lead to more underserved communities qualifying for an FNMA mortgage.

When you consider how much money renters spend on their monthly housing costs, it would seem absurd that automated underwriting systems wouldn’t already account for those expenses during the review process. But that’s exactly what the status quo has been.

Fannie Mae’s automated underwriting system could be viewed as a double-edged sword in this regard. On the one hand, it has sped up the application process and made it easier to verify borrower credentials. But by omitting timely rent payments as a qualifying factor, these systems simultaneously made it more difficult for people across the country to secure a home loan.

That wasn’t by design, of course. Even so, recurring rent payments have proven to be a blind spot for the system. Fannie Mae deserves a lot of credit for addressing this issue head-on and owning up to the inherent inequality of its assessment processes.

Federal Housing Finance Agency Acting Director Sandra L. Thompson pointed out the discrepancy between the intent of automated underwriting systems — accurately gauge an individual’s lending worthiness — and the actual results:

“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.”

– Federal Housing Finance Agency Acting Director Sandra L. Thompson

Bottom line: With this updated underwriting system, more renters will be able to qualify for an FNMA-approved mortgage, making homeownership an achievable goal for far more people around the country.

The trouble with credit history

Running credit inquiries and checking credit scores has long been an important step in the mortgage process. However, rent is rarely included in those credit checks. According to HousingWire, more than 95% of renters will not see their rent payments show up in a credit report.

On the other hand, credit bureaus typically do include on-time monthly mortgage payments in credit reports and credit scores. You could take two people with roughly the same applicant profile — income, debt, employment history, etc. — but if one person has a mortgage while the other rents, the homeowner is going to have a huge advantage.

Why is that, though? Paying your rent in full and on time each month is just as valuable as a piece of insight into your credit-worthiness as any other metric. If you can keep up with your rent, it stands to reason that you’ll be able to manage the financial responsibility of a home loan with equal success.

Housing payment history predicts mortgage performance

You could even go a step further and argue that your ability to keep up with your monthly rent is a better predictor of your mortgage performance than other eligibility criteria — even credit history. A 2018 Urban Institute studyrevealed that people who consistently paid their housing costs over a 24-month period only rarely missed a payment over the following 36 months. Researchers found that these trends were consistent across the board, regardless of an individual’s credit score.

These findings shouldn’t come as much of a surprise. After all, monthly housing expenses are nearly on par for both renters and homeowners when comparing similar home types and income levels. Not to mention, people are more likely to prioritize housing expenses over other forms of debt like outstanding credit card balances or car loans in times of financial adversity. Keeping a roof over your head is always going to come out on top. That holds true whether you have a mortgage or a landlord.

Accounting for rent history would, in fact, be a good thing for both renters and lenders. A steady track record of on-time rent payments would indicate that there’s less risk of a new homeowner defaulting on their mortgage. And there’s nothing mortgage lenders love more than reducing their risk exposure.

Focusing on credit history leads to inequality

Despite the need to review an applicant’s credit score as part of the approval process, ignoring other signals of financial health fundamentally put some people at a disadvantage. It’s easy to take for granted the barriers that many people face simply to establish credit and build an unblemished credit history.

But many, many people do struggle to build the kind of credit that lenders like to see when reviewing loan applications. These discrepancies often run along socioeconomic lines, which can mean that certain underserved communities become effectively barred from the dream of homeownership.

Everyone needs to pay rent, though, and that’s what makes it such a useful signal for financial health. Some people might have student loans, credit cards or car leases in their name, which will help build a credit history. But that won’t be the case for everyone, and so making rent payments a more prominent part of FNMA’s automated underwriting system makes perfect sense.

In conclusion

It’s been a long time coming, but we have to tip our cap to Fannie Mae and its decision to update its automated underwriting system. Incorporating recurring rent payments into the loan application process will help address some of the innate inequalities baked into the lending world. By making this change, FNMA will pave the way for many more people to qualify for a mortgage and buy a house they can call their own.

We should always strive to remove barriers to homeownership and help people realize their dreams. We sincerely hope that this is a taste of things to come, and that other organizations — whether they’re government agencies, private lenders or government-sponsored enterprises — will follow Fannie Mae’s lead.

Everyone deserves the chance to realize their dream of homeownership. We need to encourage people to explore their loan options, not put up barriers that stand in their way. Kudos, Fannie Mae, on taking such a giant leap forward for the mortgage industry.

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