Access to credit already presents significant barriers to borrowers. As credit tightened following the Great Recession, many were locked into tenancy and out of the wealth-building benefits of homeownership.
This is especially true for Black and other borrowers of color, who still experience the effects of systemic discriminatory financial policies and practices that block equal access to wealth and credit. Today, Black households have lower credit scores than white households at every income level. This is a key driver of the racial homeownership gap.
Recently, there’s been a push to incorporate alternative data, like rental payment history and cash flow, which evidence suggests better predict mortgage performance. Our new research explores how recent innovations to include alternative data in mortgage underwriting affect access to homeownership, especially for those who have been historically underserved.
We find the addition of alternative data to mortgage underwriting algorithms—especially on-time positive rental payment history—could help boost credit scores for many Black applicants and narrow the racial homeownership gap.
Credit scores used in mortgage underwriting don’t tell the full story of someone’s financial health
Credit scores reflect a person’s traditional credit history (including a consumer’s loan and credit card payments, percentage of credit limits used, length of credit history, debts, and number of accounts all contribute to credit scores), and lenders use them to determine the likelihood an applicant will repay their mortgage.
But the credit score models currently used in mortgage underwriting don’t include rental payments, even though they are most renters’ largest expense. Consequently, many consumers are either unscoreable (because they have insufficient credit data to generate a score) or have scores that underestimate their likelihood of repaying.
Establishing credit history typically requires financial resources to begin with (a down payment for a house or someone able to cosign on a credit card, for example), reinforcing a system that often requires wealth to create wealth.
Expansive government programs that increased labor standards, shored up the banking industry, and dramatically increased access to homeownership helped the white middle class establish credit in the 1930s. But these same policies stripped Black communities of wealth (PDF) by excluding them and reinforcing discrimination in employment, housing, and credit.
Including rental payment history in credit scoring models would help consumers establish a payment track record without requiring access to wealth. And because monthly rent and mortgage payments can be comparable amounts, score models that consider rental payment history may more accurately reflect an applicant’s ability to pay their mortgage.
Credit scoring models can either incorporate all rental payment history—called full-file reporting—or only the payment history of renters who have made on-time payments—called positive payment reporting. While full-file reporting would likely score more consumers, renters who have missed payments would see their scores decline. Alternatively, positive payment reporting would help consumers demonstrate their ability to make housing payments while protecting renters’ scores from harm caused by late rental payments, landlord errors, and disputes. As consumer advocacy groups have pointed out, consumers are better off with no scores than low scores, which can impede access to rental housing, employment, and insurance.
Including rental history can increase scoreablility
Few studies have examined the impact of rental payment history on credit scores because the three major credit bureaus have rental payment data on fewer than 2 million of 44 million renter households. Plus, rental data are most commonly reported when missed payments go to collections agencies, so much of credit bureaus’ existing data are negative. This means consumers are penalized for missed payments, but not rewarded for making payments.
We partnered with the fintech company Esusu Financial—which facilitates rent reporting to the credit bureaus—to analyze their rent reporting data. We analyzed the effects 12 and 24 months of positive payment data had on a representative sample of 12,492 consumers.
We found previously unscoreable consumers typically received prime VantageScores and that those with the lowest initial scores experienced the largest increases. No- and thin-file consumers had average scores of 676 and 686 with 12 and 24 months of on-time rental payments. And consumers with previous scores below 600 experienced average point increases of 42 and 45 and average percentage increases of 8.9 percent and 9.4 percent after 12 and 24 months.
Including 12 and 24 Months of Positive Rental Payment Data in Credit History Can Increase Scores
|12 Months of Positive Rental Payment|
|No or thin file||<600||600–660||661–780||>780|
|Average point change (#)||676||42||41||27||7|
|Average point change (%)||8.9%||7.6%||4.4%||1.0%|
|24 Months of Positive Rental Payment|
|No or thin file||<600||600–660||661–780||>780|
|Average point change (#)||686||45||40||27||7|
|Average point change (%)||9.4%||7.4%||4.4%||1.1%|
Source: Data analysis provided by Esusu.
Note:Years include 2021 for renters who made 12 months of positive payment, and 2020 and 2021 for renters who made 24 months of positive rental payments.
Including rental payment history in credit scoring can positively affect Black households
Proponents argue that incorporating rental payment history into credit scores will help reduce the racial homeownership gap because Black households are overrepresented as a share of renters. But this fact alone doesn’t mean Black households would disproportionately benefit from rent reporting. For rent reporting to help close the racial homeownership gap, Black households must also be overrepresented as a share of renters who have made on-time rental payments.
According to the Understanding America Study, Black renter households comprise 16.1 percent of all renter households with 12 months of on-time payments, while Black households account for 12.2 percent of households overall.
These results show positive payment reporting can help increase access to credit and homeownership. And although we don’t have racial and ethnic data on the renters in Esusu’s sample, Black households’ overrepresentation as a share of households with 12 months of on-time rental payments suggests widespread rent reporting and inclusion of positive payment history in credit score models would disproportionately benefit Black borrowers.
How policymakers can help borrowers realize homeownership gains
Until recently, the fragmented nature of the rental market, with many different types of properties and landlords, and the difficulty of reporting rental payments to all three credit bureaus with different systems have limited the feasibility of rental payment reporting, but recent advances made are promising.
Several fintech and rent reporting companies, including Bilt rewards and Esusu, have also made the rent reporting process easier. In 2021, Freddie Mac announced a partnership with Esusu to use closing cost credits to incentivize multifamily operators to report on-time rental payments to the credit bureaus. More recently, Fannie Mae announced a similar pilot program that allows eligible multifamily property owners to share timely rental payment data.
And in October, the Federal Housing Finance Agency approved new generations of credit scoring models that incorporate rental payment in their algorithms, providing tangible benefits for renters who have their positive payments reported to the credit bureaus.
Our analysis finds that the adoption of these updated credit scores and increased availability of rental payment data could expand access to homeownership to renters who otherwise wouldn’t meet credit standards, helping close the Black-white homeownership gap in the process.