For years, many tenants have struggled to qualify for a loan, simply because their credit reports are too thin to generate a credit score.
Now, that’s about to change, creating homeownership opportunities for millions of first-time homebuyers, especially in underserved communities.
Starting Sunday, July 10, Freddie Mac will consider on-time rent payments as part of its Loan Product Advisor, or LPA, automated loan decision system, the mortgage giant has announced.
Placing importance on on-time rent payments in automated mortgage underwriting mechanisms is brand new.
“It’s a big deal because rent payments aren’t being credited by credit reporting 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 exorbitant rent, then were tricked by mortgage originators into borrowing, and then repaying, consumer loans to generate acceptable FICO scores. It’s a bit crazy to go into debt to outsmart the system.
Previously, borrowers needed a minimum average FICO score of 620 in automated underwriting to qualify for a conventional Freddie Mac or Fannie Mae loan.
“We’re all excited about the opportunity to expand first-time buyer homeownership,” said Brad Seibel, head of mortgages at Sage. “It will likely be 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 rental history. With the borrower’s permission, a mortgage broker or mortgage lender submits the borrower’s bank account data to the APL to identify 12 months of on-time rent payments to determine eligibility.
Banking 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 seeking rent increases. Rent amounts paid do not have to be the same over the past 12 months, as long as they were paid on time.
Eligible rent payment data includes 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’re unbanked and paying your landlord in cash or money order, Freddie Mac allows lenders to manually underwrite loan records through rent verification, or VOR, with the landlord. Whether you can find a mortgage lender to manually underwrite is another matter.
Say hello to Freddie Mac. This changes the situation.
Freddie Mac rates the news: The 30-year fixed rate averaged 5.3%, a whopping 40 basis points lower than last week. The 15-year fixed rate averaged 4.45%, 38 basis points lower than last week.
The Mortgage Bankers Association reported a 4.5% drop in mortgage applications from the previous week.
At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $900 less than this week’s payment of $3,594.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 5%, a 15-year conventional at 4.5%, a 30-year conventional at 5.375%, a -balance ($647,201 to $970,800) at 5.25%, a 30-year conventional high balance at 5.75%, and a 30-year jumbo purchase loan at 5.625%.
Eye-Catching Loan of the Week: A 30-year jumbo purchase mortgage, locked in for the first five years at 4.375%, with a cost of 0.75 points.