This article is about building credit with timely housing payments.
One of the strongest credit tradelines consumers can have is by building credit with on-time housing payments. Most landlords do not report rental payments to the credit bureaus. However, there is a way of reporting on-time timely monthly payments to all three credit reporting agencies. Mortgage underwriters view timely rental payments and low payment shock as a strong compensating factor when underwriting borrowers. Payment shock is the difference between a homeowner’s new mortgage payment versus their prior monthly payment. If the payment shock is less than 5%, it is considered a strong compensating factor and viewed extremely favorably by the mortgage underwriter.
It is no secret that paying your bills on time will increase your credit score. But what if you are currently renting and do not have a mortgage? Can you still get credit score improvements for making on-time housing payments? The answer is, yes. In this blog, we will detail how to potentially increase your credit score by reporting your on-time housing payments. We will also briefly discuss changes by Fannie Mae and Freddie Mac regarding rental payments. Gustan Cho Associates are experts in all areas of mortgage lending and especially in credit scoring. Many of our borrowers have less than ideal credit but we are still able to help them obtain a mortgage. We are able to offer our mortgage loan products without additional lender overlays. We do not have any extra credit score requirements on any of our mortgage products. For more information on mortgage lending without lender overlays, please call Mike Gracz on (800) 900-8569. Our team may also be reached at mike@gustancho.com. Feel free to email more information on your specific credit scenario. Our team will reach out with a detailed response.
Building Credit With Timely Housing Payments: Credit Scoring Explained
A credit score is a prediction of how likely you are to pay back a loan and make those payments on time. Your overall credit score uses many pieces of information to compute a credit score number. The main factors that make up a credit score are your ability to make payments on time, your current unpaid debt, the number and type of accounts reporting, the length you have had open accounts, how much of your available credit are you using (utilization), and do you have delinquency such as collections, foreclosure, or a bankruptcy? All of this information is compiled into an easy-to-read credit score and used by lenders all over the nation. Credit scores are used when buying a vehicle, financing furniture, leasing a property, and many more scenarios. The uniform credit scoring model is easy to screw up and hard to fix. Back in the day, a bank would give you a loan based on your personal reputation, but as the population grew, it was next to impossible to keep track of. Now we have standardized credit scoring models used by all of the major mortgage agencies. Mortgage companies are required to use the 2, 4, 5 scoring models. Each number represent the scoring model used by each of the three major credit bureaus:
- Experian – FAIR ISAAC SCORE 2
- TransUnion – CLASSIC 04 SCORE
- Equifax – BEACON 5.0 SCORE
Get Credit For Paying Monthly Rent On Time
How to get credit for on-time rental payments?
If you have had a mortgage or currently have a mortgage, you know that your payment history is reported every single month to all three credit bureaus by most mortgage lenders. But if you are renting from a management company or a private landlord, you may not be receiving these credit score points. As of recent, numerous services are available that will report your rental payments to each credit bureau every single month, giving you a housing payment history. Many of these services are relatively cheap, approximately $10 a month, and usually have a startup fee between $50 and $100. In 2017, TransUnion conducted a study following 12,000 participants for a full 12 months. These 12,000 individuals reported their rental payments and received an average boost of 16 points after just six months. For borrowers who had lower credit scores, to begin with, the increases were more substantial helping many individuals get over the 620 credit score threshold. Getting above 620 can give you access to many mortgage programs. Having on-time rental payments can be important when trying to rent another property but also incredibly important when attempting to obtain a mortgage.
The Importance Of Timely Housing Payments
Please keep in mind that this process will substantially increase your responsibility for making payments on time. Just like any other account reporting to the credit bureaus, a missed payment will negatively impact your overall credit rating. Just a single 30-day late housing payment will have a significant impact on your overall credit score profile. If you have been struggling to make rental payments on time, you may not want to sign up for one of these services. If your payment history is solid, then we highly recommend this process.
Current Updates By Fannie Mae And Freddie Mac
These government-sponsored enterprises (GSE’s) understand that for many families, their monthly rental payment is their largest financial obligation. So not receiving credit for on-time rental payments can lower their overall mortgage qualifications. On-time rental payments will now be factored into Fannie Mae’s underwriting calculations and missed payments won’t necessarily keep a borrower from obtaining a mortgage. According to Fannie Mae, when they went back to analyze their data from their desktop underwriting system (AUS), they found that 17% of borrowers who were turned away for a mortgage may have been approved if their on-time rental payment were considered.
Renters Can Start Building Credit With Timely Housing Payments To Qualify For A Mortgage In The Future
Freddie Mac has also come up with a solution. Freddie Mac has now encouraged multi-family landlords to report positive rental payments to the credit bureaus to help renters get a better shot for qualifying for a mortgage in the future. Freddie Mac is highly motivated to start this process. The landlord will be required to report this data every month and in return will receive a closing cost credit when buying a multi-family house. To see a closing cost credit given by a major agency like Freddie Mac is a huge change.
Building A Strong Credit History To Prepare To Qualify For A Mortgage With A Rental History
The American Dream is still to own your own home. Paying rent on time is one of the strongest credit tradelines you can have. Lenders view verification of rent as one of the strongest compensating factors any loan applicant can have. It is a good sign to see the major players in the mortgage industry step up and understand the importance of housing payment history. Achieving homeownership is still the American dream, no matter what the media may tell you. Building equity in a home is a great way to build wealth and stability for your later years in life. Most generational wealth is transferred through real estate. That is why government agencies are trying to level the playing field.
Qualifying For A Mortgage With A Mortgage Company Licensed In The Multiple States With No Lender Overlays
Gustan Cho Associates are experts when it comes to analyzing your credit report. We have seen credit scores as low as 400 and as high as 850. Many of our borrowers have had minor or even major issues with their credit reports in the past. Even if you have been turned down by your current lender, we encourage you to reach out to our team. Since we are experts in credit, we will come up with a custom financial plan to help you qualify for a mortgage as soon as possible. Please reach out to our team today to go over your current credit requirements. Please call the credit expert Mike Gracz at (800) 900-8569 or send an email to mike@gustancho.com.
