In a market heavily tilted toward Sellers, boxed-out Buyers have something to cheer about. Mortgage giant Fannie Mae recently announced that they would consider on-time rent payments as a part of mortgage approvals beginning September 18, 2021. This is an incredible development for many Buyers who’ve been shut out of the market due to credit issues. Let’s look at some of the implications and how this may help you and your clients.
Why rent payments matter to Buyers, especially now
Millennials currently comprise the largest market share of potential Buyers. However, they also lag behind other generations in terms of home ownership. Affordability, lack of inventory, and the crushing burden of debt (particularly, student loan debt) have all factored into these challenges. But with Fannie Mae’s change (and Freddie Mac likely soon to follow), a wider swath of Buyers have a better chance to pursue home ownership.
The logic behind the change is simple. If you’re making timely rent payments, you’re likely to make timely mortgage payments. However, this simple logic eluded lenders and underwriting systems until now.
This is a big deal, especially for younger Buyers and Black Buyers. According to Fannie Mae, “About 20% of the U.S. population has a skimpy credit record, and Black and Hispanic people fall disproportionately in that group.” Additionally, “Nearly 30% of Black consumers cite an insufficient credit score or credit history as their biggest obstacle to getting a mortgage, compared with 18% of [W]hite consumers.”
In short, this decision is a step in the right direction for allowing people to access home ownership. It may contribute to closing a cavernous racial gap in home ownership. According to the Census Bureau, only 45% of Black Americans owned a home, compared to 74% of White Americans in Q2, 2021.
How will rent payments factor in going forward?
Technology will play an important role in this shift. According to Fannie Mae, their automated underwriting system will review whether a loan application is eligible for purchase. This is important, since Freddie and Fannie purchase up to 60% of all American mortgages.
If the automated system says the loan would NOT be eligible for purchase, it will then turn to a 12-month record of on-time rent payments. If that analysis determines that a years’ worth of on-time payments would make the mortgage eligible for purchase, Fannie Mae would contact the lender.
Then, Fannie Mae would ask the lender to ask the borrower for permission to access the potential Buyer’s bank statements to determine whether they had made on-time payments over 12 months. If they have, it could increase the likelihood that a Buyer could become eligible for a mortgage. Additionally, missed or inconsistent payments wouldn’t necessarily reduce the likelihood of mortgage eligibility.
What’s in it for agents?
The fact that Fannie Mae is considering on-time rent payments as a mortgage-eligibility determinant might increase your client pool. According to Fannie Mae, 17% of rejected applicants would have been approved had rent payments been included in the calculations.
Additionally, this shift creates more avenues for people who are otherwise strongly positioned to buy, if not for lacking credit. For example, a Buyer may have a good job and strong rent-payment history but simply never opted to use credit. Whereas these people were at an extreme disadvantage before, Fannie Mae’s new tack may give them renewed confidence in the prospect of home ownership.
Finally, using rent payments can help otherwise-qualified clients enter the home ownership search with confidence. After all, as many as 1 in 5 credit reports includes a mistake that could disqualify mortgage seekers, according to the FTC.
New opportunities for Buyers and agents
These new opportunities for Buyers could bring about new opportunities for you. More opportunities could also mean more chances for you to build trust and expand your footprint. Providing or recommending a Home Warranty Service Agreement (i.e., home warranty) from 2-10 Home Buyers Warranty (2-10 HBW) may be a step in the right direction for you and your Buyers, especially now.
Once Buyers overcome the hurdles of affordability and credit checks, the cost of home ownership becomes a concern. In fact, one of the biggest concerns newer Buyers have is the cost of maintenance. A home warranty from 2-10 HBW can help homeowners address this concern.
In addition to quality coverage for major systems and appliances, 2-10 HBW provides helpful guides and tips to help homeowners settle in. That can help you provide added value to your clients (and ideally keep them from calling you with every little thing).
2-10 HBW offers comprehensive systems and appliances home warranties to help protect your clients from unexpected repair and replacement costs. Contact us to learn more.