Leveraging Rental Payment History to Approve More First-Time Homebuyers
Rent Payment History is both willingness and ability to pay
The best indicator of whether someone can repay a monthly mortgage payment is whether they are consistently paying their current housing payment. Unfortunately, for many years, rent payment history was not a reliable data source. Rent payments were often paid via cash or check. Rent payments were often paid to so-called "Mom & Pop" landlords. In the rare case, rent payments were paid digitally to a tech-enabled property manager, there was no incentive for that company to report the payments to credit bureaus or lenders. The result was that the most accurate indicator of the willingness and ability to repay was not available to underwriters or automated underwriting systems (AUS).
Fanie Mae's Day One Certainty (D1C) and Freddie Mac's AIM now accept and review an applicant's rental payment history. Given the strong correlation between rent payment history and likelihood of on-time mortgage payments, it would be easy to assume the industry immediately adopted rent payment history into the initial application and underwriting of a mortgage loan. Unfortunately, this was not the case.
Rental payment history is yet another data source - documentation or data - that the mortgage loan officer (MLO) needs to request and collect from the applicant. As a result, the existing workflow associated with most mortgage lenders did not include this data source and it was determined to be too potentially disruptive to collect with the initial 1003. The process evolved to use rental payment history as a "second look" or last resort for loans that would otherwise be denied. In that context, MLOs would collect limited documentation (i.e. income & employment) for an initial AUS submission. The AUS submissions that returned a "denied" or "refer" result would then be offered the option to submit rental payment history to turn a denial into an approval. More often than not, first-time home buyers were denied twice because the initial AUS results could not be overcome by the later submission of 12-24 months of on-time rental data. Regardless of whether a "No" or "Maybe" became a "Yes," the process of collecting detailed data multiple times deterred many MLOs and lenders from utilizing this critical GSE policy change.
After an initial launch, the conventional wisdom in the industry became "rental payment history is too complicated or too difficult to use." This conclusion is short-sighted and incomplete. Lenders must move toward a holistic underwriting process that digitally collects rent history, income, assets and employment ALL upfront and makes the best determination of both ability to repay (i.e. approval) and risk (i.e. pricing). Rental history will never work as a fall back, second look or accommodation. In fact, rental history as a proxy for cash flow could have a greater determination of mortgage eligibility than another other data source someday. Until we get there, we must start moving to a proactive process where we collect rental payment history upfront with income, asset and employment data.
Yes, this may appear like it's a little more work or expense for an initial applicant but, as lenders standardize the process, it will become more efficient and more cost effective than the alternative. The alternative is - 1). Missing out on purchase loans that the GSEs could otherwise approve and 2), Incurring additional expense to collect the data later after initial underwrite was not approved.
MBA and Next Belt Strategies LLC published a White Paper on the use of rental payment history in mortgage underwriting. Download and review the White Paper for more information on the best timing and workflow to utilize the GSE allowances for rental payment history. A simple change in workflow and timing could make a major difference in your purchase volume for this year and years to come.