How to use rent history to qualify for a mortgage
If you have made your rent payments on time for the past twelve months, this can help you qualify for a mortgage even if your application is initially rejected. This means that many borrowers who were previously ineligible for a mortgage can get approved, if you follow the right guidelines.
Your first step is to apply for the mortgage and submit your loan application, including standard personal and financial documentation such as W-2s, tax returns and bank statements. No additional paperwork or information is required by the lender at this point in the process.
When you apply for the mortgage, the lender pulls your credit report -- which is standard procedure. If your application is declined due to a low credit score caused by a lack of credit history, also known as a thin credit profile, this is where your rent payment history comes into play.
At this point, it is important to highlight that if your credit score is low due to negative events such as a bankruptcy or multiple charge-offs, your rent payment history is unlikely to help your application. If your score is low, however, due to a limited credit history -- meaning you have a small number of current or prior credit accounts -- a consistent rent payment history can be highly beneficial and enable you to get approved for the mortgage.
In this scenario, when your application is initially declined the lender receives a notification indicating that reviewing your rent payment history may produce a different outcome. The lender then requests your permission to review your payment history.
You may be wondering how the lender reviews this information because rent payments are usually not included on your credit report for the vast majority of applicants. If they were, your credit score would likely be higher and you may not need to go through this additional step to qualify for the loan.
To address this information gap, lenders use technology from an approved third party vendor that scans your online bank statements for the past twelve months. If you have made your rent payments on time over the past year and the payments are consistent with the information on your loan application, your mortgage goes from being rejected to approved, assuming you meet the following three important requirements:
At least one applicant on the mortgage must be a first-time home buyer with a credit score, even if the credit score is lower than what is usually required
You must have at least a twelve month rent history with payments of at least $300 per month
Rental payment history can only be used for a mortgage to purchase your primary residence. It cannot be used for investment properties or second homes
Keep in mind that the lender will not electronically review your bank statements without your approval. Additionally, the technology service used by the lender can identify rent payments made via check or automatic withdrawal but not cash.
We should also emphasize that not all lenders use the technology providers required to verify your payments. If your credit score is low due to a limited credit profile and your loan application may benefit from including your rent payment history, make sure a lender uses an approved service before you apply for the loan.
We recommend that you contact multiple lenders in the table below to determine if they use an approved technology provider. Shopping lenders is also the best way to save money on your mortgage.
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In closing, a consistent rental payment history can help you overcome a limited credit profile and corresponding low credit score to qualify for a mortgage. If you fall into this category, it is important to work with a lender that utilizes an approved vendor to scan your bank statements to verify your past rent payments. In short, paying your rent on time can be the key factor that helps you get approved for a mortgage.
Sources
"Fannie Mae Introduces New Underwriting Innovation to Help More Renters Become Homeowners." Press Release. Fannie Mae, August 11 2021. Web.
"B3-2-03, Risk Factors Evaluated by DU: Rent Payment History." Selling Guide: Fannie Mae Single Family. Fannie Mae, September 1 2021. Web.
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