Big Win for Renters: Credit Score Overhaul Paves Way for Homeownership

Banks finally wake up—your rent payments might actually count now.

For years, landlords got paid while credit bureaus ignored the data. That changes today.

The new system crunches rental history into creditworthiness. No more perfect tenants getting rejected for mortgages while deadbeats with car loans skate by.

How it works: Consistent rent payments now factor into FICO calculations. Late Netflix bills still hurt more than timely rent checks—because finance never makes sense.

Bottom line: The 45 million renters in America just got a backdoor boost to their homebuying power. Too bad housing inventory remains at all-time lows.

Key Takeaways

• Government-backed mortgage giants Fannie Mae and Freddie Mac are now allowed to accept a different credit score that considers rent and utility payments.
• However, it may be a while before the VantageScore 4.0 can be used, since mortgage lenders say setting up rules and processes will take time.
• The change could give more renters access to a mortgage, but it could also lead to more delinquencies, lenders said.
  

Proposed changesto federal mortgage lending could make mortgages more accessible for many people with thin credit histories. But mortgage lenders say it will take time for these changes to be adopted.

Earlier this month, Federal Housing Finance Agency (FHFA) Director Bill Pulte said that Fannie Mae and Freddie Mac can now "immediately" accept the VantageScore 4.0 credit score in addition to the FICO score, which is what's currently used for mortgage approvals. 

Why This Score is Different

VantageScore 4.0 calculates risk differently than FICO. The most significant difference is that VantageScore includes rent and utility payments in its calculation, while FICO doesn’t. Credit scores for mortgages are based on a variety of categories, like credit payments history, current debt loads and length of credit history.

The company behind VantageScore said that adding rental and utilities payment histories to that list will “grant millions of creditworthy Americans the golden opportunity to own their homes.”

Since the current mortgage lending process is widely based on the FICO credit score, changing that system won’t be easy, mortgage lenders said. Fannie and Freddie have each said publicly that they are working on new guidelines for lenders and underwriters using VantageScore.

Mortgage Industry Awaits More Details

“I don't know how long that's going to take, but it's not going to be quick. It probably wouldn't be this year,” said Phil Crescenzo Jr., Nation One Mortgage Corporation southeast division vice president.

Michael McCarthy, Naples, Fla. branch manager of mortgage lender PRMG, said that it makes sense to look at rent payments as a part of the credit review process.

“Part of being credit worthy is the ability and willingness to make a payment. So if you're looking at the rent, and you have the ability and the willingness to make that payment, this should count for something,” he said.

It’s unclear when the mortgage lending industry will be ready to adopt the new score. Several leading groups saying they need more clarity over rules and processes before moving forward with VantageScore 4.0.

“The mortgage industry and global buyers of mortgages and [mortgage-backed securities] are not likely to adopt VantageScore anytime soon,” said Christopher Whalen, chairman of Whalen Global Advisors LLC.

Renters Already Have Some Options in Mortgage Application Process

Even though VantageScore 4.0 might not be adopted right away, it's already possible for potential borrowers to use their history of consistent rental payments to help them get a mortgage. Mortgage lenders said they have some flexibility to include rental payment history in the application process. Renters with a good payment history should talk with lending officers about their options.

“Let's say you were in a slightly lower credit score bracket, where you wouldn't get that approval unless you hit the verified rent. We can actually do this now, but it's manual. You don't need Vantage to do it,”  Crescenzo Jr. said. 

The Change Comes With Risk

Some industry experts worry that a change to how credit is scored could lead to extending mortgages to borrowers who aren't necessarily creditworthy, potentially leading to more defaults. 

“The problem is not the credit score, but low income and high inflation," Whalen wrote in an e-mail. 

McCarthy agreed that the change could also lead to more buyers with poor credit getting loans, even as some renters could benefit from the new score.

“There's definitely the possibility that both may be true," he said. "If you're extending [loans] to more borrowers that deserve credit, you might also be extending it to borrowers that don't deserve the credit,” he said.