A person’s credit score is a key factor in whether a lender approves or denies their mortgage application. But how credit scores have been traditionally calculated has created disparities regarding who can build credit.
People with low incomes and people of color are more likely than others to have low credit scores and be credit invisible, often because they lack access to conventional financial services. In turn, this limited access to credit restricts their ability to buy a home, a critical way households build wealth.
To address these disparities, some credit scores and mortgage underwriters have begun adopting alternative data, such as rental payment history and bank statements, in their assessments. At a recent Urban Institute event, government, nonprofit, and industry experts gathered to explore new research on how using alternative data has and can improve mortgage underwriting.
Their discussions highlighted several ways alternative data can help consumers—especially those who have been marginalized by financial service providers—build credit beyond traditional methods.
How does reporting rental payment history affect credit scores?
Using rental payment data to calculate credit scores has become more popular over the past five years, with the number of rental tradelines reported on consumer credit files increasing more than thirty-fold.
Ethan Dornhelm, vice president of scores and predictive analytics at FICO, explained that as of 2024, around 2.7 million consumers have rental trades reported in their credit files. That’s 3.5 percent of the 77 million total renters nationwide. Consumers with at least one rental tradeline in their file are more likely to be younger credit-building populations, with an average age of 38 and FICO score of 650. In comparison, the average credit filer is 53 with a score of 715.
Panelists also looked at how using rental payment history could affect traditional credit scoring models and credit-building opportunities for underserved populations.
In a forthcoming randomized controlled trial study, Brett Theodos, senior fellow at the Urban Institute, finds that incorporating rental payment history data into existing credit scoring models has a positive, statistically significant effect on VantageScores, with a larger impact for consumers with no or low scores. Five months after the study, the share of people with a credit file increased 12 percentage points. Additionally, around 31 percent of the study population that started with a subprime score moved up to the near-prime category or better by the end of the study.
These results are largely the same when using a different credit score. Jon Lawless, vice president of homeownership at Bilt Rewards, found that rent reporting increased FICO scores for Bilt customers, on average, but created more meaningful increases for renters with FICO scores below 540. For those just outside the mortgage-ready credit score range (540 to 659), the effect was smaller but still beneficial.
These findings align with what Yvette Ross Kane has observed in her work as director of asset management at the Washington Housing Conservancy. The organization helps the residents it serves—many of whom have low or no credit scores—report their rental payments to major credit bureaus. As a result, 327 residents established credit for the first time, and more than 70 percent of residents improved their credit scores.
At the same time, the Theodos and Lawless analyses both show that adding rental payment history can present risks to consumers who start with higher credit scores. Incorporating a new rental tradeline could lower these consumers’ average length of credit history and cause a small dip in their credit scores, explained FICO’s Dornhelm.
Letting renters know how their rental payment history could affect their scores ahead of time could mitigate this issue. Based on their findings, Bilt Rewards now informs consumers how rent reporting could change their credit score before they opt in.
How can using alternative data improve mortgage underwriting?
Lenders can also adopt and use cash flow data directly in mortgage underwriting. Jonathan Gurwitz, credit lead at Plaid, specified three distinct phases of the process in which alternative data could be used, outlined in the table below.
Most mortgage underwriters use alternative data at the verification phase of mortgage underwriting, but some underwriters have begun using alternative data in other phases to support underserved consumers, including people with low incomes and people of color.
Since March 2023, the Federal Housing Administration (FHA) has required lenders to report positive rental payment history in the algorithm it uses to evaluate FHA borrowers’ mortgage applications, known as the Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard. By September 2024, the FHA accepted around 6,060 applications through TOTAL using borrowers’ positive rental payment history.
According to a recent study by Wenzhen Lin, an economist at the US Department of Housing and Urban Development, mortgage applicants with positive rental payment history whom the FHA has accepted tend to have lower FICO scores, fewer borrower assets, and lower annual incomes compared with applicants accepted without rental data. Despite having less favorable financial profiles, applicants with positive rental payment history who were accepted were found to have lower delinquency rates than those with the lowest scores who were directly accepted.
Other underwriters have started to consider cash flow data from bank transactions in their assessments. Since 2022, Freddie Mac’s automated underwriting tool, Loan Product Advisor, has been able to consider cash flow data (which includes rental payment data) in its assessments, said Srijana Giri, senior director of products, credit, and capacity at Freddie Mac.
The financial technology company Form Free has created the Residual Income Knowledge Index (RIKI) score, an adaptive metric of sufficient cash flow that relies on residual income to measure a borrower’s risk of delinquency. The company’s chief executive officer and founder Brent Chandler explained the RIKI score is not intended to replace traditional credit scoring models but can complement them and create a more comprehensive profile of borrower risk. Underwriters could use the RIKI score during all three phases mentioned above.
Although there has been meaningful progress in the use of alternative data, more work is needed to facilitate rent reporting to credit bureaus and promote the use of alternative data through data standardization and greater lender participation.
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