Your rent is probably the largest monthly payment you make at the moment. And even if you make on-time payments for years, it never helps to increase your credit score or your chances of getting a mortgage approval until now. Well at least on the getting a mortgage side.
In a recent study of previously denied mortgage applications, 17% of those people who were denied will now qualify for a loan because of this change in conventional loan guidelines with Fannie Mae.
So starting September 18, 2021, Fannie Mae will now count 12 months of on-time rental history as a positive factor in getting approved for a mortgage.
You might have some questions about that, like who is Fannie Mae and what is a positive factor? Fannie Mae is a government-sponsored enterprise that oversees one type of conventional loan.
So there are normally two main types of conventional loans. There's Fannie Mae and there's Freddie Mac that each has its own set of guidelines that are slightly different from each other. But basically, you need a 620 or a higher credit score, and a 3% down payment or higher to qualify for a conventional loan.
Well, it's as cryptic as it sounds basically Fannie Mae has their own software called Desktop Underwriter that they then give to loan officers and lenders. So what they'll do is they'll take your loan application and all the data that comes with it, they'll push it into the software called D.U. or Desktop Underwriter, and it gives a loan recommendation basically saying, is the good to go or is it rejected or denied? So that's, what's happening here. That's what this positive factor is that can work in your favor to push an approval.
Essentially, what they're saying is showing 12 months of on-time rental payment history is going to help nudge an approval in your favor. This isn't going to make up for it. Bad credit or foreclosure or no down payment or anything like that. All this is going to do as a positive factor that just adds to the approval to push it over the edge. If you are on the line of qualifying.
Now, there are some basic requirements for this to work.
So first of all, you do have to be a first-time homebuyer. Basically what a first-time home buyer means. Is it someone who hasn't been on the title to a home? You haven't owned a home within the past three years. So if that's you, you are a first-time buyer.
Next, you have to have a rental payment of $300 per month or more. Now for a lot of people, that's a very easy qualification because if you have less than $300 a month in rent, that's insane, we all want to know how you got that.
Meaning that you're going to live in the home. For one year or more with that has to be your intent.
You also have to share 12 months of bank history with the lender for them to be able to verify the actual rental payments. This is one of the big problems with why rental payments aren't included normally on credit reports or mortgage applications, are they're hard to verify? Because you need to see this 12-month history here. So it has to be proven through bank statements which can be an issue for a lot of people if it's not documented in that way.
Now my first thought was won't this part people who don't have 12 months of on-time payments if they can't show that on their bank statement? And Fannie Mae has made this clear that this will only help. So if you can't prove these things through bank statements, or if you don't have on-time payments for the past 12 months, then it's going to be like, it never even existed. It won't be factored in at all. So don't worry about that.
Think of it similar to Experian. Has there a credit boost thing that really only helps it's not gonna take away? It's exactly like that.
The Head of Fannie Mae single Family Division, Malloy Evan said, "it's not relaxing or credit standards. It's looking for reliable indicators of the borrower being able to meet our credit standards".
So this is mainly for people who are on the line of qualifying. So this isn't something where someone with a 580 score can now automatically get a loan approval just because they had on-time rental payments. That is not at all what this is. I know there's gonna be people who are like, no, anyone could get a mortgage. That's not true.
What it's doing is it's taking someone who is on the line, so maybe they were, they couldn't get approved. They had a 660 score, and what this would do is bump them, nudge them a little bit closer to getting approved. As if they had maybe a 680 credit score.
So it's not directly impacting the application in that way, but it's just this nudge towards an approval. It's a positive factor to offset. Maybe some of the other negative things might be on the loan application, but it didn't no way is going to make up for these huge things. It's not like you had a bankruptcy and now just because you have 12 months, on-time rental payments, you can get approved for a mortgage.
All the requirements of a conventional loan with Fannie Mae still exist. And it really is more about creating more predictable ways for loan approval for people who have consistently been paying their rent. Especially because I hear all the time people saying I've been paying $1,500 a month in rent for years, but the bank won't even approve me for a thousand dollars a month mortgage payment. How am I supposed to be able to get into homeownership? If I can't even be approved for a mortgage is less than what I've already been paying in rent.
So hopefully this should change that outcome for a lot of people or at least statistically, what we've seen is 17% of people who have been previously denied.
So now, if you were recently denied for time, I strongly suggest you try to reapply after September 18th. If you have 12 months of on-time rental history to see if that can help push the loan approval in your favor, where as maybe you didn't have that advantage before, I strongly suggest you try again. If you do have the 12 months on-time rental. So to apply all you need to do, it's not like a special program or anything.
All you need to do is talk to a loan officer. I have a link if you want to be connected with one in the description, if you'd like to explore that as an option and as with all program changes in 2021, the inevitable question is raised, how will this impact the housing market?
It's probably going to increase demand.