Fannie Mae announces major change in its underwriting guidelines

Move intended to increase first-time homebuyers’ chances of qualifying for a mortgage

Fannie Mae announces major change in its underwriting guidelines

Fannie Mae has announced that it will soon factor in first-time homebuyer’s rental payment history in its underwriting guidelines to create a “more inclusive mortgage credit evaluation process.”

The mortgage giant said that starting September 18, its automated underwriting system Desktop Underwriter (DU) will allow single-family lenders to automatically detect recurring rent payments in the applicant’s bank statement data – simplifying the process for borrowers.

This also means that people will be able use on-time rent payments to help qualify for a mortgage. Any records of missed or inconsistent rent payments identified in the bank statement data will not negatively impact the borrower’s ability to qualify for a loan, but borrowers have to provide check stubs or bank statements as proof.

Fannie said that the DU enhancement aims to create homeownership opportunities for renters with a limited credit history but a strong rent payment history.

“Many renters believe they will never be able to buy their own home because of insufficient credit,” said Fannie Mae CEO Hugh Frater. “We can responsibly expand mortgage eligibility by including positive rent payment history in underwriting risk assessments.”

According to Fannie Mae’s research, lenders considering a first-time homebuyer’s history of consistent rent payments makes a huge difference in the applicant’s chances of qualifying for a mortgage. In a recent sample of mortgage applicants who had not owned a home in the past three years and who did not receive a favorable recommendation through Desktop Underwriter, 17% could have received an “Approve/Eligible” recommendation if their rental payment history had been taken into account.

“The ability to use rent payments to qualify for a mortgage is helpful to people who don’t have a lot of credit accounts,” Holden Lewis, home and mortgage specialist at NerdWallet, explained. “When people have credit cards, auto loans, student loans, and other types of debt, they have a rich credit history that mortgage lenders can rely on. But it’s harder to assess someone’s creditworthiness when they have few accounts or none at all, and these people will benefit from being able to use on-time rent payments to qualify for a mortgage.”

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“It is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners,” Frater said.