How on-Time Rent Payments Can Build Your Credit Score With Fannie Mae

• Fannie Mae will now consider rent payment history when approving borrowers for mortgages.
• You still need a credit score of at least 620 to qualify for a mortgage with Fannie Mae.
• You may also use a rent reporting service to make sure your rent payments count toward your credit score.
• Read more stories from Personal Finance Insider.

If you’re worried you’ll never be approved for a mortgage because of your bad credit or lack of credit history, you may be closer to homeownership than you think.

In August, Fannie Mae, the leading source of mortgage financing in the US, implemented new technology that will include consistent rent payments when assessing the creditworthiness of a borrower. 

Traditionally,

mortgage lenders

only used FICO credit scores to assess whether or not a borrower could have a mortgage, but credit scores rarely show the whole picture of a borrower’s payment history.

Rent payment history may give lenders a better idea of a borrower’s payment habits

Late payments to credit lines can stay on your credit report for seven to 10 years, making it difficult to raise your score in time to qualify for a mortgage with the lowest interest rates.

Additionally, the Consumer Financial Protection Bureau reports that 45 million consumers are “credit invisible,” meaning they are denied credit because they don’t use or can’t access credit. Black, Hispanic, immigrant, and low-income communities are more likely to become credit invisible because of barriers to credit access, according to research conducted by VantageScore.

Credit invisible people are less likely to qualify for a mortgage because lenders are looking for proof that a borrower can commit to monthly payments on time. Essentially, you have to have credit to get credit, which can be frustrating and confusing for first-time borrowers.

In contrast, the history of on-time rent payments may give a more accurate picture of a borrower’s payment habits than a credit score. During a financial hardship, renters typically prioritize rent payments over credit card payments.

Missing a credit card payment can negatively impact your credit score, but an on-time rent payment usually goes unreported. Adding rent payment history can give mortgage lenders a clearer picture of a borrower’s eligibility for a mortgage.

You still need a credit score of at least 620 to be eligible

Here are the eligibility requirements for a borrower to include their rent payment history, according to Fannie Mae. To be eligible, a borrower must:

• Be a first-time homebuyer purchasing a principal residence
• Have a credit score of at least 620
• Have been renting for at least 12 months
• Have rent payments of $300 or more per month
• Have bank accounts that document the most recent 12 months of recurring rent payments.

If you meet these requirements, you shouldn’t have to do anything extra to make your rent payments count. Because this technology was only implemented a few months ago, it couldn’t hurt to call your lender and double-check that your mortgage broker knows to look for your rent payments in your bank statements when you start the application process.

You can also enroll in a rent reporting service

Financial tech services like RentReporters, LevelCredit or Rental Kharma report your on-time payments to credit bureaus for a monthly fee that’s typically under $10. Rent reporting services can raise your credit score and give you credit history without opening a loan or a credit card. 

If you pay rent digitally, there may be an option to send each monthly payment to credit reporting services automatically. Make sure to check that box to instantly boost your credit score and record your on-time rent payment.

If you pay your landlord with a paper check, you may be able to use a rent reporting service with your landlord’s verification.

Besides improving your credit score, rent reporting services also make it easier for lenders to consider your rent payment history when applying for a mortgage.