Rent Payments Now Count for Mortgages

New Policy Expands Homeownership Access

Millions of Americans can now have their rent and utility payments counted towards their credit scores, a significant change in the U.S. housing finance system. Effective immediately, Fannie Mae and Freddie Mac, key players in the mortgage market, are accepting new, modern credit scores that include this rental history. This move aims to help more creditworthy individuals qualify for homeownership.

The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) announced the policy change, emphasizing its potential to make housing more affordable and accessible. This update allows for greater consideration of a borrower’s financial responsibility, especially for those who may not have a traditional credit history but have consistently paid rent on time.

Breaking Down the Credit Score Change

For decades, paying rent on time did not directly impact a person’s credit score. This meant that responsible renters might have struggled to qualify for mortgages because their consistent payment history was overlooked. The new policy, however, recognizes that paying rent is a strong indicator of a person’s ability to manage mortgage payments.

Lenders use credit scores to decide who gets a mortgage and at what interest rate. Investors use these scores to price mortgage-backed securities, which in turn influence mortgage rates nationwide. By incorporating rental and utility payments, these new credit scoring models, like Vantage Score, aim to provide a more complete picture of a borrower’s financial reliability.

Competition Drives Innovation in Credit Scoring

The shift is also fueled by a push for greater competition among credit scoring companies. The Credit Score Competition Act, passed in 2018, aimed to bring progress to this area.

Officials stated that previous administrations had stalled implementation, allowing credit score companies to increase prices significantly. For example, one credit scoring model saw its price jump from $4.95 to $10 per loan.

Now, with the acceptance of Vantage Score and the potential inclusion of FICO 10T, there’s increased pressure on credit scoring agencies to offer more competitive pricing. Vantage Score has reportedly lowered its price to $0.99 per loan, and FICO has also offered to reduce its price to $0.99 under certain conditions. This competition is expected to lower costs for lenders and, ultimately, for consumers.

Market Impact and What Investors Should Know

This policy change is expected to impact millions of Americans, with officials estimating it could help tens of millions gain access to homeownership. Freddie Mac has already processed $10 million worth of loans using Vantage Score in an initial test, indicating strong market demand. About 21 lenders are expected to participate in the initial rollout.

For investors, this development could lead to a broader pool of borrowers and potentially more stable mortgage-backed securities. The FHFA has stated that they have carefully priced the risk associated with these new scores. They believe that by incorporating more predictive data, such as rent and utility payments, the risk to Fannie Mae and Freddie Mac may actually decrease, not increase.

Future of Homeownership and GSEs

Officials expressed optimism that this move is part of a larger effort to make home buying more affordable. They pointed to the potential for mortgage rates to come down over time. While the direct impact on lowering mortgage rates is not yet guaranteed, the increased competition and broader access to credit are seen as positive steps.

The question of privatizing Fannie Mae and Freddie Mac, and ending their conservatorship, remains. Officials indicated they are ready to execute the President’s vision on this matter whenever a decision is made. For now, the focus is on improving the current system to benefit American home buyers.

Looking Ahead

The Federal Housing Administration (FHA) also plans to accept Vantage Score and FICO 10T for its loan approvals in the coming months, though a firm timeline is still pending. This coordinated effort between HUD and FHFA signals a significant update to how creditworthiness is assessed in the U.S. housing market, aiming for a more inclusive and competitive environment.

Source: WATCH LIVE: HUD, FHFA announce major shift in US housing finance system (YouTube)