People want to buy homes. Demand is on the rise. Homes available for purchase are in short supply and they are more expensive than ever before. You would think becoming a first-time homebuyer is tough enough already.
For those of you who have been wary of opening credit cards or taking out car loans you may find it even more challenging to put your name in the hat for a home purchase. A limited credit history may cause numerous lenders to use that fact against you and charge you a higher interest rate on your mortgage. Your venture into the housing market may end up feeling like it’s over before you’ve even had the pleasure of being outbid on your first 10 attempts to purchase a home.
Finally, this may be changing in your favor. One of the country’s mortgage giants wants to help you. Fannie Mae will be rewarding accountable renters with increased access to affordable mortgages on September 18th. Although paying your rent in a timely manner every month seemed like a futile exercise in the past, it seems it will now aid you in becoming a homeowner.
Pay your rent on time, improve your chances of owning
The massive government-sponsored mortgage player Fannie Mae has announced that the underwriting system used by its lending partners will start factoring on-time rent payments into its evaluation of borrowers’ creditworthiness. This will go into effect on September 18, 2021.
Mortgage lenders who get consent from mortgage applicants will be allowed to recognize recurring rent payments in their bank statement data. Rent payments can be flagged if they’re made either by check or electronically and show up in an applicant’s payment history.
“Fannie Mae has announced that the underwriting system used by its lending partners will start factoring on-time rent payments into its evaluation of borrowers’ creditworthiness on September 18, 2021.“
Because Fannie Mae purchases and guarantees loans for much of the American mortgage market, it has substantial impact over industry standards and practices. This is the case despite the GSE not originating loans on it’s own.
Fannie Mae recently released a statement declaring, “for qualified renters who may have limited credit history but a strong rent payment history, Fannie Mae’s [underwriting] enhancement creates new opportunities for homeownership while promoting safe and sound lending.”
“Incorporating rent payment data will allow U.S. Bank to expand sustainable homeownership opportunities for underserved markets and consumers,” according to the bank’s executive vice president, Tom Wind.
Why this move will help homebuyers
Even with on time rent payments being generally considered a fairly dependable gauge of reliability and financial stability, less than 5% of renters see their rent history reported on their credit reports, according to Fannie Mae.
This scenario frequently leads to borrowers having far shorter credit histories, a factor that works against their favor when they apply for mortgages. If you don’t have a proven track record as a borrower, lenders do not have proof of your capability to pay off creditors — and not much reason to offer you a competitive interest rate on your mortgage.
With the addition of 12 timely rent payments to your credit history every year this should change what constitutes a limited credit history in the eyes of lenders.
Lenders factoring in first-time homebuyers’ histories of regular, on-time rent payments in the past would have equated to additional borrowers being eligible for mortgages, this according to Fannie Mae’s own research
Fannie Mae stated, “In a recent sample of mortgage applicants who had not owned a home in the past three years and did not receive a favorable recommendation through [underwriting], 17% could have received an ‘Approve/Eligible’ recommendation if their rental payment history had been considered.”
Furthermore, only consistently on-time rent payments will be factored into your evaluation as a borrower. Missed payments will not have a similarly negative effect, Fannie Mae recently declared.
LOTS OF AVAILABLE CREDIT
Lenders look at overextended borrowers as risky borrowers. Though this category is a bit more complex than others, it’s not beyond comprehension by any means. The general thought amongst the knowing has been to avoid using more than 40 percent of the credit available to you. Refrain from maxing out your available lines of credit. The more you do, the riskier you appear in the eyes of lenders. Always keep an eye on your debt levels, particularly if you intend on applying for more credit in the future.
Improve your home purchase odds through other channels
For those of you who are responsible renters with a limited credit history, Fannie Mae’s determination to assist lenders take your rent payments into consideration could be massive. Though there’s other things you can do to better improve your credit situation in the eyes of lenders.
Your rent payment history still will not be a factor in how your credit score is calculated after Sept. 18. Your rent might always be paid on time, but your score won’t necessarily be in the range lenders want it to be.
If you haven’t had the chance to lay eyes on your credit score in a while, it’s easy today to check your score for free. The lowest mortgage rates generally go to borrowers with the highest credit scores; you may end up realizing that yours needs some upward growth before you apply for a mortgage.
It may be possible that you’re paying your rent on time, but at the detriment of your other financial obligations. If you have multiple high-interest debts you’re having a tough time paying, think about rolling them into a lower-interest debt consolidation loan. You’ll pay less in interest, eliminate your debt faster and have more money to work with.
We strongly recommend you don’t apply for a mortgage with the very first lender who makes you an offer. It would be far more wise to compare offers from at least five lenders to find the best rate for your area and for someone with your credit profile. Mortgage shopping always helps lead to the best results.
In addition, if attempting to gather enough money for your down payment is a big homebuying hurdle, attempt to generate some extra income. A side hustle can help you save up, or even a trendy app can help you collect some returns in the stock market. Multiple platforms allow you to invest with a small amount of money and profits can be plentiful over time.
In closing, happy house hunting to those currently renting. This new move from Fannie Mae is sure to help many of you realize your dreams of being a homeowner!
The elimination of the adverse market fee makes refinancing more affordable in 2021.
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