Brent Chandler of FormFree: the Business Case for Jumping on the Rent Payment History Bandwagon
Brent Chandler is Founder & CEO of FormFree, Atlanta.
The case for considering a mortgage loan applicant’s rent history is compelling. Limited credit history disqualifies many renters ― even those with great rent payment history — from homeownership, and multiple studies confirm that factoring in rent payment history typically increases credit scores. The conundrum for first-time homebuyers, many of whom are renters, is that fewer than 5% of consumers today have their positive rent payments reported to the credit bureaus. That means the overwhelming majority of first-time homebuyers who pay their rent consistently have been unable to use their positive payment history to their advantage when qualifying for a loan — until now.
With its September 18 addition of a “positive rent payment history” feature to the Desktop Underwriter validation service, Fannie Mae is effectively removing one longstanding barrier to homeownership. But are lenders ready to get on board? As a CEO, I understand that any significant operational change begins with building a business case — so let’s examine the upsides and potential risks for lenders considering jumping on the rent payment history bandwagon.
The market potential is massive
Industry experts agree that incorporating rent payment history into the credit assessment process will expand homeownership opportunities for qualified renters, but the million-dollar question is: how much potential volume are we talking? While analysts have been reluctant to quantify the potential impact of this change, we have enough data to speculate.
According to the National Association of Realtors®, the annual share of first-time homebuyers last year was 31%, and Genworth’s First-Time Homebuyer Market Report specifically clocks the number of new homeowners in 2020 at 2.38 million. With HUD reporting 43.6 million rent-based households in 2019, there is clearly a ton of room for growth in the first-time homeowner segment.
There is also plenty of consumer appetite, with decades of renter surveys consistently reporting that upwards of 70% of renters want to become homeowners. As recently as this August, a Lending Tree survey found that 76% of renters would rather own a home, and of that group, 32% said their credit history is one of the biggest barriers holding them back.
The downsides are minimal to non-existent
With the potential to help more borrowers (and increase origination volume in the process) established, a lender’s next question is likely to be, what hoops will my team need to jump through to implement this, and at what cost?
The good news is that a majority of mortgage lenders today already work with one of Fannie Mae’s authorized report suppliers, even though they may not realize it. That’s because DU’s positive rent payment history feature is powered by asset data furnished by FormFree and select other digital verification of asset (VOA) providers. DU automatically identifies recurring rent payments within the VOA report and takes them into consideration when assessing credit eligibility for qualified first-time homebuyers. In other words, lenders that are already getting their VOA reports from a Fannie Mae authorized TSP shouldn’t have to lift a finger to take advantage of positive rent payment history!
Another common lender concern is that rent payment history could actually negatively impact some borrowers’ credit assessments, but that isn’t the case. Only positive rent payment history is considered; DU does not evaluate late or missing rent payments or count them against a borrower in any way.
FormFree has also enhanced AccountChek with proprietary features that may not be available in competing VOA solutions. For instance, AccountChek’s 60-day report backed by a 12-month VOA data payload shields lenders from inadvertently viewing non-rent transactions, such as large gift deposits, that could derail the financing process.
If you won’t take my word for it, take it from FHFA Acting Director Sandra L. Thompson: “There is absolutely no reason timely payment of monthly [rental] housing expenses shouldn’t be included in underwriting calculations.”
The business case is clear: positive rent payment history is a low-risk, high-return “no brainer” for lenders that without a doubt expands homeownership opportunities to historically marginalized borrowers, particularly the 20% of the U.S. population that has little credit history — a group in which Blacks and Hispanics are disproportionately represented. This is one bandwagon we should all jump on.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)