rent to own The strategy has proven to be a reliable way for investors to sell their properties at a profit to tenants. What is usually not so relied upon in these scenarios is the assurance that your tenants will improve their situation. credit score Enough to qualify for a mortgage and actually be able to afford your rental.
Help for this cause has come from an unexpected source: government-sponsored institutions (GSEs) mortgage backers. Fannie Mae and Freddie MacWho are allowing rent and utility payments included in the credit report to be factual In mortgage approval. it This is especially beneficial for landlords, as they can now easily monitor these two essential things to ensure that tenants stay on track in their quest to become homeowners.
New rules: When to start counting rent and utilities
What the advanced scoring model aims to include starting July 10 federal regulator It is described in a press release from the Federal Housing Finance Agency (FHFA) as a “new era of credit score competition.” new move is intended Making mortgage approval easier for potential buyers to offset rising home prices over the years under the former credit score system.
According to the FHFA, both Fannie and Freddie are moving forward with VantageScore 4.0 and FICO 10T models, which are specifically designed to include optional data, such as rental history, once reported to the major credit bureaus.
FHFA calls this change is intended Expanding access to home ownership for creditworthy borrowers was ignored before By legacy systems that relied heavily on traditional credit cards and installment loans.
How do mortgage lenders access the data
The new system will allow mortgage lenders to submit a borrower’s bank account data, including 12 consecutive months of rent payments. According to Freddie Mac CEO Michael DeVito, this could be a game-changer for potential borrowers with limited credit history.
“By incorporating a borrower’s responsible rent payment history into our automated underwriting system, we can help make home ownership possible for qualified tenants, especially in disadvantaged communities,” DeVito said in a statement. housingwire.
Borrower’s access to banking Information It is possible End with borrower’s Allowed through normal money transfer/Payment Apps like Zelle, Venmo, or PayPal.
Landlords are a part of the equation
Freddie Mac announced in November 2021 who wanted it multi Family Landlords must report positive rental payments through the three major credit reporting bureaus Asusu Financel, enabling renters to become home owners.
Freddie Mac CEO Michael DeVito said at the time:
“Rent payments are often the largest monthly line item in a family’s budget, but paying your rent on time doesn’t show up on credit reports like mortgage payments. This puts the 44 million families who rent at a significant disadvantage when they look for financing for a home, a car or even an education. While there is still much to be done, this is a meaningful step toward addressing this age-old problem.”
Sister GSE Fannie Mae first announced in August 2021 that lump sum rental payments would be to be factual In its underwriting calculations. Bill Pulte, president of Fannie Mae and Freddie Mac, said social media This change “expands loan access to millions of forgotten Americans – people who live in rural areas, renters who pay their rent on time every month – and (helps) reduce closing costs.”
role of landlords
Rent and Utility Payments Do not automatically factor In a tenant’s mortgage eligibility. Landlords or property managers typically require Work with the fare-reporting service To transmit data to Equifax, Experian, or TransUnion. To this end, Freddie Mac’s multifamily division has launched a program that encourages this, including on-time rental payments for up to two years.
For landlords of single-family properties who hope to sell their tenant-occupants, Freddie Mac has updated this Loan Product Advisor (LPA) So that the lender can tell when the rent payment history of the borrower is documented.
it This typically happens in one of three ways: either identifying recurring rent transfers through property reports; By submitting leases, bank statements, or canceled checks; Or through a third party verification report with prior tenant approval.
pennymaca major correspondent lenderThat said, for some types of mortgages, a positive history of rent payments can upgrade the loan’s risk class from “caution” to “accept”, improving the borrower’s chances of approval. A required component for approval is timely payments for 12 consecutive months without any delays.
Fast Track First Time Home Buyers
Among eligible tenants, landlords may want to mention Freddie Mac Desktop Underwriter (DU) System to their tenantsWho identifies At least 12 months of recurring bank statements totaling $300 or more and uses that information to approve first-time home buyers. The advantage is that it does not directly affect the consumer’s credit report or score.
Similarly, Fannie Mae’s Multifamily Positive Rent Payment Reporting Pilot Program Allows landlords in multifamily zones to share positive rent payments with the credit bureaus.
To be considered for a Fannie Mae mortgage under the current guidelines introduced in 2022, tenants must meet the following criteria:
- Be a first time home buyer who purchases the original residence,
- Have a credit score of at least 620 (non-traditional credit is generally not allowed),
- Have been living on rent for at least 12 months,
- Pay rent of $300 or more per month, and
- Have bank accounts documenting the most recent 12 months of recurring rent payments.
Rent reporting can help potential home buyers
Rent reporting makes a difference, according to early monitoring of the Fannie Mae rent reporting program, with renters seeing an average of one Their credit score increases by 40 points after one payment were involved in. as of 2023 bankrate According to the article, more than 23,000 tenants established credit through the program.
As of November 1st cnbc In the article, TransUnion found that rental reporting can increase credit scores by an average of about 60 points.
The article explains that rental reporting services such as Boom, hired reporter, And fare kharma Will verify the tenant’s payment history and submit the information to the credit reporting bureaus. However, all of these companies charge for their services.
“It’s a logistical problem for the bureaus to get rental data from landlords, because there are so many landlords and many of them are very small,” says Jim Droske, president of Illinois Credit Services. “So, rent reporting companies have recently stepped in to fill the gap.”
final thoughts
Landlords will probably need to check with their tenants to see how their potential lender is qualifying them. a 2026 guide background check solution Note that while FICO 8 is widely used In many types of mortgage loans, this generally does not include rental data. However, FICO 9 and FICO 10 do.
Additionally, the extended rent and utility reporting option will not automatically make your tenants eligible for a mortgage if they are behind on credit card or other payments. That’s why a landlord’s first step in selecting tenants is so he can one day buy their property. screen carefully Before renting.
For landlords with a large number of properties – some of which they are looking to sell – this may involve contacting long-term tenants with good payment histories to see if they are interested in buying.
The ideal candidate is not someone with black marks on their credit profile whom you are attempting to make a shining example of fiscal responsibility, but rather a tenant who Only Not there. Sufficient Requires credit history and more data to qualify.
