Buying a Home? How Paying Your Rent On Time Can Now Impact Your Credit Scores

Buying a Home? How Paying Your Rent On Time Can Now Impact Your Credit Scores

by | Sep 24, 2021

Previously, the only way rent played into your credit score was when you missed a monthly payment. And, of course, missing the rent reflected negatively on your credit report when trying to apply for a mortgage.

Now, thanks to recent changes made by the federal government, mortgage finance giant Fannie Mae allows on-time rental payments to become a positive factor in credit scoring when it comes to buying a home.

Credit history is a key element in evaluating a borrower’s ability to make a mortgage payment. But, fewer than 5% of renters today have their rent payments reported on their credit bureau report, putting many prospective first-time homebuyers at a disadvantage. That’s because renters who consistently pay their landlords on time don’t see that positive activity reflected anywhere, until now.

Not paying your rent has an indirect impact on your credit when that outstanding debt lands at a collection agency because that is reported to the credit bureaus.

Fannie Mae, the federally-backed institution that buys mortgages from the banks and other financial institutions that size up and underwrite aspiring borrowers, announced plans to factor in regular rent payments into their underwriting calculations for mortgages. That means your rent has more gravitas when it comes to accessing financing for your dream home.

Paying your rent on time now can help you get approved for a mortgage. But that’s not the only step you need to take to get a home loan.

1. Check Your Credit Report and Scores

In order to see if you qualify to buy a home, future borrowers can check their credit report and scores to see where they are at by using a credit report monitoring service. These services can provide current credit scores as well as score simulators to help determine how to positively impact these scores. Things like paying down credit cards and removing any inaccuracies on your credit report can help you reach your credit goals.

2. Figure Out Your DTI

A borrower must determine what their current debt-to-income (DTI) ratio is by counting their monthly payments against their monthly income. Most mortgage loans require a borrower’s DTI not surpass 43%.

3. Save Money

For down payments, most people start at around 3% of the price of the home for some first-time homebuyers. Repeat buyers can get a conventional loan for as little as 5% down. Borrowers also need to consider closing costs, which can average about 3% to 5% of the loan cost.

Keeping good credit is of utmost importance when it comes to borrowing because the better your credit, the better your terms of financing can be. And that is all the more critical when it comes to making a huge purchase like a home.

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*Source: Fair Isaac Corporation.

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