Fannie and Freddie To Allow Credit Scores Based on Rent and Utilities Payments

Prospective homebuyers with a history of on-time payments for rent and utilities may soon find it easier to qualify for a mortgage, thanks to changes at Fannie Mae and Freddie Mac.

U.S. Federal Housing Finance Agency Director William Pulte, who is also the chairman of federally controlled Fannie and Freddie, announced the move at a press conference in Washington, DC, on Wednesday.

"If you pay your rent on time, you are more likely to pay your mortgage on time," Pulte said. "For decades, our housing system ignored that simple fact, because your credit score would never count it. That's nonsense, because credit history should include rental history."

Wednesday’s announcement adds new credit score rules to Fannie Mae’s Selling Guide, the official policy manual for lenders selling residential mortgages to the company.

Last year, Pulte announced Fannie and Freddie would allow mortgage lenders to use VantageScore ratings to assess borrower creditworthiness, in addition to or instead of traditional FICO 10T scores.

VantageScore takes into account rental and utility payment history reported to Equifax, Experian, or TransUnion. FICO 10T also considers positive and negative rental payment history reported to the agencies.

Since the pilot began, Freddie Mac has taken delivery of $10 million in loans and will securitize them soon, Pulte said. He expected the change could help "tens of millions" of prospective homebuyers.

'Golden age of homebuying'

Department of Housing and Urban Development Secretary Scott Turner said that the Federal Housing Administration will also permit the use of VantageScore 4.0 and FICO 10T as eligible credit scoring models for FHA-insured mortgage underwriting.

"We are taking a meaningful step toward expanding access to homeownership, particularly for creditworthy borrowers who may have been overlooked under older systems," said Turner.

As a result of the change, Pulte said, FICO CEO Will Lansing is considering reducing the cost of the company's credit scores from $10 to 99 cents, matching the cost of a VantageScore.

Allowing VantageScore, which the three major credit bureaus created as a credit-scoring alternative to a FICO score, encourages competition to lower prices for consumers, Pulte said.

The FHFA regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks. Together, they provide $8.5 trillion in funding for the U.S. mortgage markets and financial institutions.

Turner said the move targets younger, creditworthy Americans who haven't accrued a credit history under current models.

"This will benefit only applicants that are creditworthy and trustworthy," Turner said. "We've been through the financial crisis, we understand that. The rigor will stay in place, but we want to make it more available and more affordable."

Modernization play

The National Association of Realtors® has advocated for more competitive and modern credit scoring.

NAR Chief Advocacy Officer Shannon McGahn said the move would "lower costs, improve efficiency, and open the door to qualified borrowers who may have been overlooked under older models.

"By allowing the use of multiple credit scoring approaches, including those that incorporate rent, utility, and other payment histories, this policy can help create a more complete and fair assessment of creditworthiness,” McGahn said.

The change comes as prospective homebuyers are trending older. NAR estimates the first-time homebuyer is 40 years old. With the housing market short millions of units, especially starter homes, younger buyers face an uphill battle.

FICO, in a statement, supported the announcement and modernization in general. It stood by its model, which it said is the “most predictive credit score available today."

In a statement, Isaac Boltansky, head of public policy at major mortgage lender PennyMac Financial Services, also praised the move. He said it "introduces much-needed competition into a critical segment of the mortgage process.” 

A creditworthiness modernization could be a boon to homebuyers, Realtor.com® senior economist Jake Krimmel says. But it might also amount to a “well-intentioned but largely futile attempt to broaden mortgage eligibility," he says.

"Unfortunately, there's no magic wand for boosting housing demand in a high-rate, high-uncertainty, low-affordability market,” Krimmel adds.

Many modern workers are in a position where they have reliable cash flow but a thin credit file. Think freelancers, gig workers, and the self-employed. They fall through the cracks of an outdated credit system and can be shut out of mortgages. And the system needs to be modernized to account for the current economy, Krimmel says. 

"The goal is to expand the pool of borrowers without lowering lending standards,” Krimmel says. "And the way to do that is by taking a more holistic and modern view of what it means to be creditworthy.”

Fodder for an IPO?

At the same time, Pulte and Turner discussed a recent Capitol Hill talking point: ending the decade-long conservatorship of Fannie Mae and Freddie Mac. Lawmakers said in February that they were working on a bill.

President Donald Trump's administration has also considered an initial public offering of the two mortgage giants this year. The plan could see both companies valued at $500 billion or more combined and entail selling between 5% and 15% of their stock. 

Pulte said this new move lowers risk and increases security, which would increase the success of a possible IPO. But he said only Trump knewwhere that prospective move stood.

“We stand ready every day to execute the president’s vision, and if and when he decides he wants to do something, we are locked and loaded and ready to go.”