Your Rental History Is Being Turned Into An Incentive For Landlords

Certified Mortgage Advisor
NMLS 1701021
Published 
November 6, 2021

Landlord can report your payment history

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

Reason why it's difficult to get a mortgage for renters

Only 10% of people have their rental history reported on their credit report. So you're talking about, about 44 million people who they make one of their biggest monthly payments. They make their rental payments on time for years, and that never works. 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 with debt, your rent is not in.

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.

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. More, most of the conventional loans throughout the United States.

Fannie Mae's solution

So Fannie Mae did a decent job trying to help here. But what Fannie Mae basically did is they said, "Hey, if you have rental payments showing up on your bank statements, we'll actually use a 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 may be paying in cash or, maybe the software can't detect those rental payments on time.

Freddie Mac's solution

Freddie Mac has done is super strange. And I'm gonna explain a little bit why 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 on credit bureau or to credit bureaus.

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

How the Freddie Mac initiative works?

So here's how this works. Basically, a person would buy a multifamily home with a Freddie Mac loan. A multifamily home can be anything from a one to four-unit conventional loan or maybe a five-plus unit, 1 million to 7.5 million dollar loan with Freddie Mac. This is someone who purchases a new loan with Freddie Mac. It's unclear if you can actually refinance and get in this program as well.

So basically a landlord purchases, a multifamily home, 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, however, I didn't hear anything from them. It's unclear, but basically, a landlord can then go purchase a multifamily home, receive a closing cost credit, and then the landlord is supposed to report the tenant's rental history to a company called Esusu.

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 affects renters

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

Can report on time payments

They can also report up to 25 months of past on-time payments for an immediate positive impact to your credit score.

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 a part of this program, whose 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 landlords really, 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 it affects the renters.

Higher credit score = Approved mortgage

It is easier to get approved for a mortgage when you have a higher credit score and 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.

Might not impact you right away

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 and your landlord, even if they have a mortgage with Freddie Mac, it's unclear if they'll be an incentive for them to go ahead and report your rental history to the credit bureaus.

Minimal incentives for landlords

And so that's one of the big problems here. Another problem is there's a minimal incentive for current landlords to make renters more mortgage-ready. So if you currently I think if you're 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 rents.

Feels like a half-hearted attempt

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 for you can refinance and get the closing cost credit and then enroll. It's just a strange way to implement.

And it really does feel half-hearted because is basically saying like, We'll just take the new people. The people who get new multifamily loans, which granted is a lot of new multifamily loans. Freddie Mac is one of the largest purchasers of multifamily loans. 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 multi-family loan or get an, gets a new multifamily loan through Freddie Mac. We'll give them a closing cost credit, which I imagine is probably going to be at least a few thousand dollars, they haven't said anything yet. So that's what I'm imagining, just to be able to.

You can report your own rental history

Then you have to enroll your tenants in this program to report their rental history to the credit bureaus, 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 cost, it says $50. And then if you want to report up to 24 months in the past, it's another one-time $50 payment. Only a hundred dollars in cost. So Freddie Mac could have gone to renters and said, Hey, we're going to roll this program. What we'll actually do is we'll help you get enrolled with this technology company called Esusu. We'll fund it for you. So we'll pay a hundred bucks and we'll help you be able to take your past on-time rental payments reports 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, we'll send incentivize them to do it. And it only goes for like more current new multi-family mortgages.

How to know if your landlord has a loan with Freddie Mac

If you're interested, if you can see if your landlord actually has a loan through Freddie Mac, you can check out this link: https://myhome.freddiemac.com/renting. 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 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 want to do it, or they're just doing it out of goodwill, which I don't anticipate that's going to happen.

Yes, you can report your own rental history

But then if you do want to enroll yourself in this, if you want to 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 add it to all three, but at least you can add it to two to help improve your credit score.

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 going to 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 bureau is be able to qualify easier for a mortgage because that can really help increase your credit score a ton. If you can see a 50% increase in credit.

Could've rolled this out differently

My issue is with the way that Freddie Mac has rolled this out. This is trying to indirectly, it feels more like they're like a, almost like virtual virtue signaling, "oh yeah, we want to help out the renters". When in reality they're more just giving an incentive to landlords to give us 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 it doesn't just stay on the side of the landlord, which seems like so much regulation. And so many products have been on the site of the landlord for such a long period of time.

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