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The Federal National Mortgage Association, better known as Fannie Mae, recently revised its mortgage qualification requirements to allow consideration of first-time homebuyers' rent-payment histories when determining loan eligibility. Here's why that matters, and what it could mean for you.
Why Fannie Mae Matters to Your Home Loan
Fannie Mae is a federally sponsored corporation that helps ensure banks, credit unions and other mortgage issuers have the funds to lend to prospective homeowners. It buys mortgage loans from financial institutions, which in turn use the cash to issue new loans. Fannie Mae either keeps the loans as part of its portfolio or bundles them into mortgage-backed securities (MBS), financial instruments that are publicly traded through investment exchanges, much like stocks.
To minimize the likelihood of acquiring loans that borrowers can't repay and to establish baseline quality for MBS offerings, Fannie Mae and its government regulator, the Federal Housing Finance Agency (FHFA), have set minimum requirements on loans Fannie Mae will buy.
Because lenders like the reassurance of knowing they can sell loans to Fannie Mae, many commercially available mortgages adhere to (or exceed) Fannie's minimum lending requirements. These mortgages are known as conforming loans, and historically applicants have had to meet the following requirements to get one:
- A FICO® Score☉ of 620 or higher.
- A debt-to-income ratio (DTI) of up to 45%—or 50% if you have large cash reserves. DTI is the percentage of your monthly pretax income used for debt payments, including the anticipated payments on your prospective mortgage.
- The ability to make a down payment of 3% or more of the loan amount.
- A loan amount that falls under Fannie Mae or Freddie Mac's annual conforming loan limit for the county where you are buying your home. That limit is reset each year: For most of the country, the 2021 maximum conforming loan amount is $548,250; in the country's most expensive housing markets, the limit is $822,375.
How New Lending Standards Help First-Time Buyers
Conforming loan requirements—particularly the minimum credit score—can be difficult to meet for borrowers with limited experience using credit.
Under new guidelines Fannie Mae implemented in September 2021, borrowers submitting applications for conforming loans can give lenders access to their bank accounts so Fannie Mae's automated Desktop Underwriter system can consider rent payment history along with other application information.
On-time rent payments are considered indicators of borrower reliability and can only influence borrower eligibility in a positive way. Late or missing rent payments, on the other hand, cannot hurt an applicant's chances of qualifying for a loan.
Inclusion of rent payment history in a loan application can mean the difference between qualifying for a mortgage and being denied one: Fannie Mae analyzed a representative sample of mortgage applications and found that, over a recent three-year period, 17% of mortgage applications that were disqualified by the Desktop Underwriter tool would have been approved if rent payment history had been considered per the new guidelines.
To take advantage of this option, applicants must:
- Be first-time homebuyers financing a house that will serve as their primary residence.
- Have an average FICO® Score of 620 or greater (more on this below).
- Have been making monthly rent payments of at least $300 for 12 months or more.
- Have bank account(s) that can document their most recent 12 months of rent payments.
Modified Credit Score Calculations for Joint Borrowers
In addition to allowing consideration of rent payment history, Fannie Mae has adjusted the way it handles multiple applicants' credit scores to determine mortgage eligibility. Fannie Mae calls for lenders to get two or three credit scores per applicant. If two scores are used, the lower of the two is used as each applicant's representative credit score; if three scores are used, the middle one numerically serves as the representative score.
Previously, if two borrowers applied jointly for a conforming mortgage, the lower of their representative credit scores was used to determine loan eligibility—meaning that the application would be denied if either applicant had a representative score below 620.
Under revised rules, a loan can be approved if the average of joint applicants' representative credit scores is 620 or greater. This means an applicant with a representative credit score below 620—which might indicate a limited or spotty credit history—could still qualify as a borrower if their co-applicant's score is high enough to average it out. (In such cases, however, the lower representative score is used to set fees and interest rates on the loan.)
This revised calculation, along with the ability to take credit for rent payment history, is intended to broaden home-financing opportunities for people with limited credit histories.
How to Improve Your Chances of Qualifying for a Mortgage
If you plan to seek a mortgage, and especially if you have a limited credit history, consider taking steps to improve your credit profile before submitting your mortgage application, including:
- Check your credit score and credit report frequently and use explanatory risk factors to focus your credit-building efforts.
- Bring any past-due debt accounts current, pay down credit card debt and avoid opening any new credit accounts until after you've received your loan. Because payment history is the single most important factor making up your credit score, commit to making all your debt payments on time.
Rent Payments Could Help Your Credit Scores
If rent payments are reported by landlords, property managers or third-party rent-collection services, they could factor into your credit scores. Renters' payments are rarely reported, but you can try asking your landlord to report your payments if you think it could help your credit score.
If they are present in a credit report, rental payments can influence credit scores calculated using the most recent versions of the FICO® Score (FICO® Score 9 and later) and all versions of the VantageScore® credit score. The most widely used version of the FICO® Score, FICO® Score 8, cannot take account of rent payments in your credit reports, however, nor can the "classic" versions of the FICO® Score used to process most mortgage applications.
As lender adoption of newer FICO® Score versions expands—and if rental payments become more widely reported to the credit bureaus—rent payment history may eventually be "baked in" to the credit scores used to evaluate mortgage applications. Until then, the new Fannie Mae application process is the best opportunity many renters have to benefit from a history of steady rent payments.