New Underwriting Innovation
Do you have dreams of becoming a homeowner, but they’ve been dashed by your credit history? You’re not alone.
In fact, some 20% of U.S. adults don’t have an established credit history. That’s a problem since credit history is a huge factor in determining mortgage eligibility. An insufficient credit history or credit score is often what makes or breaks a renter’s ability to become a homeowner.
Historically, this problem was exacerbated by the fact that most rental payments do not help establish credit history. So, even if renters made on-time payments to their landlord every month, it didn’t benefit them in the long run with their credit history.
But there’s good news: Thanks to a new underwriting innovation by a government-sponsored enterprise (GSE)1, single-family lenders will now be able to identify and use on-time rent payments to form a more detailed picture of the applicant’s credit history.
Wondering how rent payments impact your credit and ability to buy a home, especially in light of this new underwriting innovation? Read on to learn more.
- Understanding the Underwriting Process
- How Your Credit History Affects Your Ability to Qualify for a Mortgage
- A New Underwriting Innovation that Includes Rental Payments
- How Will This New Underwriting Innovation Impact Mortgage Applications?
- Qualifying for a Mortgage With Dash Home Loans
Understanding the Underwriting Process
“Underwriting” is the process by which mortgage lenders consider your financial history – like your income, assets, and debt – to determine whether or not you should qualify for a loan. For conventional loans that are supported by a GSE, many aspects of the underwriting process are automated.
During this process, the underwriter will check a variety of factors related to your finances, including:
- Verifying your employment and income. This confirms you’ll be able to afford your mortgage based on your income.
- Determining your debt-to-income ratio (DTI). As the name implies, your DTI is the ratio between how much debt you have/how much you spend compared to your income/the money you make. It’s another way of confirming you’ll be able to afford your mortgage, in addition to your other bills.
- Verifying your savings. This confirms you have the money for your down payment.
- Evaluating your assets. Your underwriter wants to know if you have assets because, in the case that you default on your mortgage, these can be used to pay the money you owe.
- Ordering an appraisal. This confirms that your loan matches the home’s value.
- Considering your credit history. And this is the one that matters most, at least in the context of our article. So how does your credit history affect your ability to qualify for a mortgage? Great question!
How Credit History Affects Your Ability to Qualify for a Mortgage
When it comes to applying and qualifying for a mortgage, most would-be homeowners understand that their credit score matters. A “good” credit score (a score of at least 670) is necessary to qualify for most mortgages. An excellent score of 740 or above will help you to obtain the best rates for your mortgage.
While a credit score is undoubtedly an important aspect of the mortgage application process, so is your credit history. Your credit history is a rundown of everything in your credit report, including your accounts, balances due, and your payment history. The more active credit accounts you have across longer periods of time, the stronger your credit history. Your credit score is based on your credit history.
But some applicants just don’t have much of a traditional credit history. For example, those who have paid cash for all of their major purchases, such as cars, instead of buying them with credit.
For these mortgage applicants, it can be difficult to prove they’re financially reliable. Mortgage lenders look at your credit history to determine whether you’re capable of taking on debts and making on-time payments. Without a credit history, this is difficult to prove, and therefore difficult to justify giving you a mortgage.
Rental Payments & Credit History
Many people assume that a rental agreement, and therefore on-time rental payments, positively impacts your credit history and credit score. However, that’s generally not the case. Less than 5% of rent payments are included on credit reports.
Unfortunately, this works against many prospective homeowners. For those who don’t have much of a credit history outside of their rental payments, it can instead look like they don’t have much of a credit history at all.
A New Underwriting Innovation that Includes Rental Payments
As outlined above, the underwriting process has not typically or historically included rental payments. However, a new underwriting innovation by a GSE is now making it possible to include rental payments in the underwriting process.
The GSE’s automated underwriting system has been adapted to analyze an applicant’s bank statement data and automatically identify recurring rent payments. The system can identify rental payments made in a variety of ways, whether via a check or electronically, including through a rental company’s payment portal or another digital payment platform.
These recurring, on-time rent payments will then be used to construct a more inclusive picture of the applicant’s financial health and increase their chances of qualifying for a mortgage.
Will Missed Rental Payments Negatively Impact Applicants?
This new underwriting innovation is intended to positively impact eligibility. Therefore, if there are missed or inconsistent rental payments in an applicants’ bank statement, those will not count against them. Instead, only the consistent, on-time payments will be incorporated into the consideration of their mortgage application.
How Will This New Underwriting Innovation Impact Mortgage Applications?
According to research, the traditional method of measuring credit history without considering rental history is a factor that makes or breaks many mortgage applications for first-time homebuyers. In fact, in one study, of those applicants who applied for but were not approved for a mortgage, 17% would have instead been eligible if their rental history had been considered during the underwriting process.
This new underwriting innovation is intended to right some of the inequities formed by historic trends in mortgage lending, especially those that fall along racial lines. Black and Hispanic communities have historically been disproportionately affected by a lack of a credit history. By incorporating on-time rental payments into the underwriting process, home financing companies like Dash Home Loans will be able to provide mortgages to a wider community of financially sound applicants.
For applicants with a strong history of paying their rent on time, but who don’t have a traditional credit history, this new underwriting innovation represents an opportunity for ownership that was formerly not possible.
Qualifying for a Mortgage With Dash Home Loans
At Dash Home Loans, we’re particularly excited about this new underwriting innovation because it aligns squarely with our values. We believe that qualifying for a mortgage should be simple, but we also believe it should be accessible for everyone. This new GSE underwriting innovation is just one step toward making this objective truly possible.
Whether you have great credit or no credit at all, Dash is the home loan lender you’ve been looking for. We’ll give you your very own Mortgage Coach who will be your guide throughout the application process (no middlemen required). Together, we’ll identify the right loan for your situation and navigate the application process painlessly (we promise)!
Contact Dash Home Loans online or call the office location closest to you for assistance qualifying for a mortgage.
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