By Peter Miller, CTW Features
Question: We are long-time renters but now want to buy. We spoke with a mortgage loan officer and were told that rental payments normally do not count toward credit scores. This is ridiculous. Rent is our biggest expense, and we pay faithfully each month. How can we use our rental payments to get better credit scores?
Answer: For as long as anyone can remember, renters have been treated unfairly when it comes to rent and credit standing. Car and credit card payments show up on credit reports, but usually not rent. The result is what you might expect.
“Credit history,” said Fannie Mae, “is a key element in evaluating a borrower’s ability to make a mortgage payment, but fewer than 5% of renters today have their rent payments reported on their credit bureau report, putting many prospective first-time homebuyers at a disadvantage.”
But here’s the good news. Renters – finally – can benefit from payments made in full and on time because of underwriting changes made by Fannie Mae and Freddie Mac.
The way the programs work is that the borrower gives permission for the lender to electronically review bank accounts. Those accounts can show payments to landlords each month.
This is a big step forward, but it’s not enough. The problem is that millions of households are “unbanked,” a fancy expression that means they do not have a checking, savings, or other accounts with a bank or credit union. These households typically pay their rent and other expenses with cash or through non-bank systems.
Freddie Mac, under the new standards, will count not only payments made through banks but also through other payment options.
“Eligible rent payment data,” says Freddie Mac, “includes check, electronic transactions or digital payments made through Zelle, Venmo, or PayPal.”
In addition to Fannie Mae and Freddie Mac, the FHA announced in late September that it would review rental payment information for first-time borrowers.
“If you’re regularly paying your rent on time, that’s a good indication you will also pay your mortgage on time,” said Federal Housing Commissioner Julia Gordon.
What about those who only pay by cash?
Speak with lenders to review the requirements for manual underwriting. In general, get – and keep – monthly rental receipts for at least the last 12 months. They’re evidence of payment. Some states require that landlords provide such receipts for cash payments. It’s also a good idea to get a statement from the landlord saying that monthly payments have been made on time and in full for the past year.
In addition to credit, there’s another reason lenders want to know about monthly rent.
Purchasing a home may cause monthly housing costs to rise above current rental payments. Higher payments, by themselves, can be acceptable, but when payments increase too much – whatever “too much” is – lenders worry about “payment shock,” a situation where monthly housing costs jump so much that payments cannot be sustained. Being able to show monthly rental costs – and having proof that such payments were made in full and on time – will do much to relieve possible lender anxiety.
Email your real estate questions to Mr. Miller at firstname.lastname@example.org.