Urban Wire Using Rental Payments in Mortgage Decisions Could Create a More Inclusive Housing Finance System
Michael Stegman, Kelly Thompson Cochran
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Mother holding child in front of home.

Renters are seven times more likely than homeowners to lack a credit score. Without a credit score, it can be challenging to get approved for a home loan and to access first-time homeownership.

These gaps disproportionately affect Black and Latinx households, who, compared with white households, are about twice as likely to rent and to lack a credit score. And these factors contribute, in turn, to the nation’s persistent racial disparities in homeownership and net worth, with the typical white family holding at least eight times as much wealth as the typical Black family for most of the past 30 years.

Rental payment history—an intuitive indicator of how well someone can pay a mortgage—used to be a significant factor in underwriting first-time homebuyers. But this practice waned when automated underwriting systems were adopted in the 1990s. In fact, Fannie Mae and Freddie Mac still use scoring models today that do not consider rental data even when they are available in consumers’ credit files. Our recent report describes the potential of new developments to revive the use of rent history in mortgage underwriting.

Making it easier for tenants to get credit for on-time payments would not fix all disparities, but it could make the housing finance system more inclusive. Federal policymakers can build upon four recent developments to expand access to and use of rental payment history to identify additional renters who are well positioned to transition to homeownership.

1. Research points to the importance of rent reporting

Results from small-scale research on the effects of rent reporting on credit scores are largely positive. They found significant reductions in the number of unscorable consumers, substantial numbers of previously unscorable consumers who have prime or near-prime credit scores, and large score improvements for many previously scorable consumers. 

Additional studies are crucial to understanding the importance of rent reporting on credit scores. The US Department of Housing and Urban Development (HUD) is planning a randomized study of rent reporting by a cohort of public housing authorities (PHAs), with the hope that some PHAs would be willing to do full-file reporting with tenants’ consent.

HUD could also build rent reporting into its Family Self-Sufficiency (FSS) program, which provides funding for PHAs to support savings and asset development and provide financial counseling. Leveraging the FSS’s existing counseling infrastructure could be an important building block, given anecdotal evidence that the positive impacts of rent reporting initiatives are enhanced when they are embedded in broader financial education programs.

2. Rent reporting technology is on the rise 

The recent proliferation of commercial rent reporting platforms has made it easier for landlords to provide data to credit bureaus. Among these platforms is the Black-owned, mission-driven financial technology company Esusu Financial, which aims to help immigrant and minority groups build credit primarily through on-time rent reporting and has more than 2.5 million rental units under contract. 

In November 2021, Freddie Mac contracted with Esusu to offer discounted loan closing costs to owner-operators of all multifamily properties it finances to report tenants’ on-time rent payments to all three major credit bureaus. Esusu automatically unenrolls tenants when they miss a payment to avoid impairing their records, though they may reenroll after six months. In less than two months (PDF; link corrected 4/22), the program helped establish credit scores for more than 6,000 people and improve scores for previously scorable consumers by an average of 43 points. This type of program could have a significant impact, especially if Fannie Mae follows suit.

The Federal Housing Finance Agency (FHFA) could also encourage Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) to find ways to make rent reporting available to tenants of multifamily properties with existing loans that account for about 40 percent of all outstanding multifamily mortgage debt.

3. New architecture exists for pulling data from bank account records

Other initiatives rely on intermediary data aggregators to pull bank account records with consumers’ permission. These initiatives could be helpful for tenants of the 10 million mom-and-pop landlords who own more than 40 percent of the nation’s rental inventory, given the difficulty of providing incentives to landlords who own only a few units to report to credit bureaus. Tenants of mom-and-pop landlords tend to be disproportionately low-income renters and people of color.

In September 2021, Fannie Mae modified its Desktop Underwriter system to consider positive rental payment history derived from bank records for first-time homebuyers rejected under its automated model. Fannie Mae reports that by the end of 2021, 1,000 initially denied loan applications were approved once rent history was factored into the decision. Even though the program has a narrow focus, it could be an important step to identify additional renters who are ready for homeownership.

4. Newer credit scoring models have emerged as a limited but important component

The GSEs can also transition to more recent credit score models that will consider rental payment data. Yet even though the FHFA has announced it will approve the use of up to two such models (VantageScore 4.0 and FICO 10), implementation will take time, and the use of third-party scores is limited in underwriting GSE loans.

For instance, Fannie Mae rejects applicants with credit scores below 620 but does not otherwise use scores to evaluate applications. Freddie Mac is moving toward a similar path. But because credit scores will remain important for minimum qualification and pricing decisions by GSEs, implementation of the newer models could still be helpful for aspiring homebuyers with sparse credit files. 

Unfortunately, outdated technology may delay efforts by the Federal Housing Administration (FHA) to adopt newer credit scoring models or make process modifications to facilitate the automated consideration of rental payment history. Given the FHA’s importance in serving first-time homebuyers of color, this is another reason for HUD to accelerate the agency’s transition to a digital platform that will enable these innovations.

Going forward

Thanks to technological innovations, the use of rental payment data could again become a staple of mortgage finance. This will take an “all-of-the-above” strategy, encouraged by financial regulators, supported and funded by HUD and the GSEs, and executed by frontline stakeholders who directly interact with aspiring homeowners.

As data access continues to increase, careful attention to consistency, quality, and consumer protections is crucial to ensure initiatives don’t have unexpected negative impacts on consumers or lenders. Efforts to standardize data fields and reporting practices are under way, and the Consumer Financial Protection Bureau’s early-stage rulemaking on consumer-permissioned data access will be important to initiatives that rely on bank account data. 

Historical experience and current challenges suggest including rental history in mortgage underwriting is not a silver bullet for closing homeownership gaps, but it has the potential, with thoughtful development, to create a more inclusive mortgage approval system that makes homeownership possible for more people.

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Research Areas Housing
Tags Housing finance reform Homeownership
Policy Centers Housing Finance Policy Center
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