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The Bad Idea That Uses Your Rent History

Certified Mortgage Advisor
NMLS 1701021
July 8, 2021

How landlords "help" you

On this episode of new programs that act like they're helping, but don't actually do much, it's landlords. Now get paid to report your rental history to the credit bureaus.

Only 10% of people have their rental history reported on their credit report. So you're talking about, about 44 million people who make one of their biggest monthly payments that make the rental payments on time for years. And that never shows on their credit score, which is one of the most important factors in being able to get a mortgage, a car loan, student loans, whatever you need, financial access to debt, your rent is not included in that. And so getting a mortgage can be really difficult when you're like I've been paying rent on time for a long amount of time, and that's not actually showing up on your credit report.

Solution of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac have tried to come up with their own solutions to this. Fannie Mae already did one thing. And if you're not familiar with these two organizations is Fannie Mae and Freddie Mac basically make the rules for conventional loans or most of the conventional loans throughout the United States.

Decent play by Fannie Mae

So Fannie Mae did a decent job trying to help here, but what Fannie Mae basically is, they said, Hey, if you have rental payments showing up on your bank statements, we'll actually use software to find those and use those as a positive factor in approving you for a mortgage. Now, this is a good start, but it's not super helpful for people who maybe pay in cash or, maybe the software can't detect those rental payments on time.

Freddie Mac's solution

What Freddie Mac has done is super strange, and I don't think this is probably the best route that they should have taken. It's a half-hearted attempt at what they're trying to solve here. So what Freddie Mac has done is they basically said we're actually gonna incentivize landlords to report rental history to credit bureaus.

So instead of actually helping borrowers directly people who are renting directly qualify for a mortgage with their current rental history. It's like an indirect long-term way to make that work, which doesn't really make sense.

How Freddie Mac's initiative works?

So here's how this works. Basically, a person would buy a multi-family home with a Freddie Mac loan. So a multi-family home can be anything from a one to a four-unit commercial loan or maybe a five-plus unit 1 million to 7.5 million loan with Freddie Mac. So you'll know right off the bat this is someone who has purchased a new loan with Freddie Mac. It's unclear if you can actually refinance and get into this program as well.

So basically a landlord purchases, a multi-family home, and the landlord then gets a closing cost credit, which at this point is unknown. We don't know what this closing cost credit is. I reach out to Freddie Mac and I didn't hear anything from them.

So it's unclear, but basically, a landlord can then go purchase a multi-family home and receive a closing cost credit. Then the landlord is supposed to report the tenant's rental history to a company called Esusu.

What is Esusu?

Basically what this company does is they will then take the rental history and report it to credit bureaus, like Equifax, TransUnion, and Experian.

How it affect renters?

It's only gonna report on-time rental payment data, which is great. So what happens if you have a late payment, it automatically unenrolls you from the program. So late payments will appear on the report. It also reports to all three bureaus, TransUnion, Experian, and Equifax, which is great because a lot of rent programs will only report to maybe one or two bureaus.

This helps improve your credit score

So this is actually improving your credit score. It can also report up to 25 months of past on-time payments for an immediate positive impact on your credit score. All in all this plan isn't bad. It's just the way that Freddie Mac is trying to roll it out is not great. This is great for the tenants who are part of this program, who their landlord automatically starts reporting their on-time rental history payments to the credit bureaus.

But the fact that they're rolling it out this way through landlords, they're trying to incentivize them through closing cost credit to do this. But there's not much of an incentive for landlords to want to get their renters moved out and mortgage ready because then that's more turnover for the landlord. So still how does it affect the renters?

Easier to get approved

It is easier to get approved for a mortgage. When you have a higher credit score. Again, you've been paying, this is one of the largest monthly payments that you have in your rent. And so being able for that to show up on your credit report is great for mortgage approval.

Rental history reporting is not yet final

Now it's unclear right now if landlords can take advantage of this in a refinance. So it probably won't currently impact you, and that's one of the more frustrating things is like, if you're currently renting right now on your landlord, even if they have a mortgage with Freddie Mac, it's unclear if there'll be an incentive for them to go ahead and report your rental history to the credit bureaus. And so that's one of the big problems.

Minimal incentive for current landlords

Another problem is there's like a minimal incentive for current landlords to make renters more mortgage ready. So if you were a landlord and you have renters, what incentive do you have to let them be more mortgage-ready so that they can move out and then you have to find more renters? There's not a lot there, which is why they're trying to go with a closing cost credit. But this only applies to people who are purchasing a new loan is what it looks like right now. It's unclear if you can refinance and get the closing cost credit and then enroll people. It's just this strange way to implement it.

Feels like a half-hearted attempt

And it really does feel halfhearted because Freddy's basically saying, Hey, so we'll just take the new people. The people who get new multi-family loans are granted a lot of new multi-family loans.

Why not finance a credit for renters who want to become home buyers?

But it's such a strange thing. There are so many different ways they could have gone about this to actually help home buyers. If they're actually interested in helping renters become home buyers, the most logical thing that they could have done is actually finance credit for renters who want to become home buyers to report the payment history already, because the way that they're doing it now is they're saying, Hey, somebody who buys a new multifamily loan or get a, gets a new multifamily loan through Freddie Mac.

We'll give them a closing cost credit, which I imagine is probably gonna be at least a few thousand dollars it's they haven't said anything yet. So that's what I'm imagining, just to be able to, then you have to enroll your tenants in this program to report their rental history to the credit bureaus.

You can report your rental history

But you can actually report your own rental history to two credit bureaus through this same company and through several other different companies and it only costs. So it's $50 a. And then if you wanna report up to 24 months in the past, it's another one-time $50 payment. So you're talking only a hundred dollars in cost. And so Fred Mac could have gone to renters and said, Hey, we're gonna roll this program. What we'll actually do is we'll help you get enrolled with this technology company called Esusu.

Guaranteed way to report rental payments

So we'll pay a hundred bucks and we'll help you be able to take your past on-time rental payments and report them to the credit bureaus. So you can now qualify for a mortgage. That's cheaper and helps more people. And if that's who they're actually trying to help, that's what makes more sense? That's directly helping, not this indirect. We'll have landlords try to in, we'll send, incentivize them to do it. And it only goes for like more, current, new multi-family mortgages. It just feels like, really?

Through Freddie Mac

If you're interested, you can see if your landlord actually has a loan through Freddie Mac. You can search up the property name and see if Freddie Mac holds that loan. Again, it's unclear if you're currently renting right now, and even if you are, your landlord has a Freddie Mac loan. It doesn't look like there's any incentive for them to go ahead and add your rental history to the credit bureaus, unless they can refinance and maybe get a closing cost credit, and then maybe they wanna do it, or they're just doing it out of a good will, which I don't anticipate that's going to happen.

Enroll yourself without your landlord

But then if you do want to enroll yourself in this, if you wanna take your rental history and go ahead and add this to your credit bureaus, if you do it yourself, you can add it to TransUnion and Equifax. You can't add it to all three, but at least you can add it to two to help improve your credit score.

Can increase of 51 points

And they do say that they do see an average credit score increase of 51 points. Every time this happens, it is $50 a year and $50 one time, if you're gonna add up to 24 months of past on-time rental payments. So just to be clear, the problem is not with this company. I think what this company is doing is fantastic.

It's helping a lot of people who haven't had their rental history reported on their credit bureaus. Being able to qualify easier for a mortgage can really help increase your credit score a ton. If you can see a 50-point increase in your credit.

Let's hope that they'll help renters more

My issue is with the way that Freddie Mac has rolled this out. This is trying to indirectly feel more like virtual virtue-signaling, we wanna help out the renters. When in reality they're more just giving an incentive to landlords to give this indirect help to renters in the future. Maybe that's a bad take. I just feel like there was a much better way, a much more direct way to help renters. With a completely different solution. That's a lot cheaper and actually helps people get into homes more. And doesn't just stay on the side of the landlord, which seems like so much regulation. And so many products have been on the side of the landlord for such a long period of time.

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Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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