How $300 in Rent Could Put You on the Path to Homeownership

The road to homeownership takes patience and discipline, but if renting is the current situation, there's a way to use it as an advantage.

Renters are able to use their payment history to help qualify for a mortgage— even if you have no credit history. Fannie Mae and Freddie Mac changed their policy a few months back, but not every renter knows how this can help pave the way toward homeownership.

Fannie Mae and Freddie Mac, government-sponsored companies that guarantee most of the mortgages in the U.S., are now allowing mortgage lenders to use VantageScore credit ratings to see if someone is creditworthy. This is in addition or instead of the FICO scores that lenders look at.

VantageScore takes rent payment history into account if the payments are reported to Equifax, Experian, or TransUnion—the three main credit bureaus.

The key is making sure your rent payment history is reported to the credit bureaus because not all rent payments are.

"Lenders will do a deep dive into mortgage applicants. To assess their risk, they need to collect as much information as possible," Melanie Musson, finance expert with Clearsurance, tells Realtor.com®. "Rent payments occasionally appear on a credit report if you pay using a service that reports to the credit bureaus, but most of the time, it doesn’t.

"However, the lender can find out your rental payment history from the property owner or management company. If you pay on time every month, that will reflect positively on you and help to lower your risk."

How it works

Fannie Mae believes if a renter is able to pay their rent each month, then they're likely to pay a mortgage consistently, too.

Mortgage lenders are now given the ability to consider consecutive monthly rent payments to help determine if a potential borrower qualifies for a home loan.

"Many times, renters can ask their property owner if they can make payments through a service that reports to the credit bureaus," says Musson. "Then, in addition to on-time payments showing up in a lender's investigation, making on-time payments will also boost their credit score, which is a win-win.

To be qualified based off your rent payment history:

• You must have been renting for 12 months straight with a minimum rent payment of $300.
• You must have made 12 recurring rent payments in a row.
• You must have limited or no credit history.

"Without a credit history, it’s hard for lenders to determine your risk level, but if you have good rental payment history, that can help you qualify for a mortgage," says Musson.

If rental payments aren't on your credit report, a lender should be able to digitally find the recurring payments made from your bank account.

There are some conditions though: The 12 consecutive rent payments need to be made without missing a month and if 12 months of rent cannot be identified, you will not be able to leverage your monthly payments to help you qualify for a mortgage.

Ways to improve your credit score

Your credit history affects your credit score. Having a high credit score will make it easier to get a loan, can lower your insurance rate, or even help you get an apartment.

Various factors will affect your credit score:

• Outstanding balances
• Payment history
• Length of credit history (how long you've been maintaining good credit)
• Applications for new credit
• Mix of credit accounts (mortgages, car loans, credit cards)

"Use credit cards wisely, but use them. Having three credit cards that you use and pay off will help establish good credit. That’s the easiest way to get started," says Musson.

You can also improve your credit score by making sure you pay loans on time, not getting too close to your credit limit, maintaining a long credit history, and correcting any errors on your credit report.

Federal law gives you the right to get a free copy of your credit report every 12 months from Equifax, Experian, and TransUnion.

The Federal Trade Commission says only one website, AnnualCreditReport.com, is "authorized to fill orders for the free annual credit reports you are entitled to by law."