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By Jeff Lazerson
On July 10, renters who pay on time can get a home-buying boost even if they have thin credit scores – a big benefit for first-time buyers in underserved communities.
PASADENA, Calif. – For years, many renters have struggled to qualify for a loan, simply because their credit files did not have enough established credit. Now, that’s about to change, creating homeownership opportunities for millions of first-time homebuyers – especially in underserved communities.
Starting on Sunday, July 10, Freddie Mac will consider on-time rent payments as part of its Loan Product Advisor (LPA) automated loan decisioning system, the mortgage giant has announced.
Giving weight to on-time rent payments in the automated mortgage underwriting gears is brand spanking new.
“It’s a fairly big deal because rent payments aren’t credited by the credit agencies,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance. “It’s a huge hole in the credit scoring system.”
First-time buyers with little or no credit often paid sky-high rent, then were coached by mortgage loan originators to borrow, then pay off, consumer loans to generate acceptable FICO scores. It’s a little insane to take on debt to game the system.
Previously, borrowers needed a minimum middle FICO score of 620 in automated underwriting to qualify for a conventional Freddie Mac or Fannie Mae loan.
“We’re all excited about the possibility of expanding first-time buyer homeownership,” said Brad Seibel, head of mortgage at Sage. “It will probably have a much-needed boost for underserved communities.”
In a nutshell, here’s how it works
First, applicants must be first-time buyers with a 12-month rent history. With the borrower’s permission, a mortgage broker or mortgage lender submits the borrower’s bank account data to the LPA to identify 12 months of on-time rent payments to determine eligibility.
The bank data is obtained from designated third-party service providers using the same automated process used to verify assets, income and employment.
Housing demand and inflation have resulted in many tenants getting rent hikes. The rent payment amounts made do not have to be the same for the past 12 months, so long as they were paid on time.
Eligible rent payment data include checks, electronic transactions or digital payments made through Zelle, Venmo or PayPal.
Using a third-party vendor to pull account statements directly from banks helps lenders avoid the risk of getting doctored documents, another industry executive, said.
If you are unbanked and you pay your landlord in cash or pay with a money order, Freddie Mac allows lenders to manually underwrite loan files through a verification of rent, or VOR, with the landlord. Whether you can find a mortgage lender to manually underwrite is another question.
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