When it comes to credit scores, renters are at a distinct disadvantage compared to homeowners.
While mortgage payments are reported by lenders to credit bureaus, landlords typically don't report rental payments – and that can hamper renters' ability to build a credit history.
Fannie Mae plans to subsidize the cost for landlords of multifamily properties it finances to help renters build their credit starting Tuesday , the mortgage giant shared exclusively with USA TODAY.
Fannie Mae will partner with three firms that serve as intermediaries between landlords and credit bureaus to report on-time rental payments.
“Given the reach that we have across the country, we're trying to be a catalyst to accelerate this adoption,” says MicheleEvans, executive vice president and head of Multifamily, at Fannie Mae. “We're incentivizing borrowers (landlords) so it benefits historically underserved groups who just disproportionately have no credit scores or lower credit scores.”
While mortgage payments are considered for credit scores – which can determine one’s ability to obtain a loan for a house, a car, or college – of the roughly 80 million U.S. adults who live in rental housing, just 1.8 million (2.3%) have rental payments reported in their traditional credit file, according to FICO, which calculates credit scores based on information collected by credit reporting agencies.
How will Fannie Mae's plan work?
Only positive payments of renters will be reported (those who fall behind will be unenrolled) and renters can choose to opt out at any time.
Eligible multifamily property owners (those with at least five years worth of outstanding loans) can share timely rent payment data through vendors to the three major credit bureaus for incorporation in the renter's credit profile.
The vendors who have been tapped to work with Fannie Mae are three New York-City-based companies Esusu Financial Inc., Jetty Credit and Rent Dynamics.
In the last five years, Fannie Mae has financed over 3.7 million units of multifamily housing. Last year, it provided financing for approximately 694,000 units of multifamily housing in 2021, with nearly 95% of those units affordable to families earning at or below 120% of the area median income, providing support for both affordable and workforce housing.
'Credit invisibles' and credit scores
One in 10 adults in the U.S., or about 26 million people, are “credit invisible,” meaning they do not have a credit history with one of the three nationwide credit reporting companies, according to a 2015 study by the Consumer Financial Protection Bureau.
An additional 19 million consumers have “unscorable” credit files, which means that their file is thin and has an insufficient credit history. In total, 20% of the U.S. adult population, or some 45 million consumers, may be denied access to credit because they don’t have scorable credit records.
Renters are seven times more likely than homeowners to lack a credit score, according to a study by the Urban Institute.
These gaps disproportionately affect Black and Latino households, who, compared with white households, are about twice as likely to rent and to lack a credit score. And these factors contribute, in turn, to the nation’s persistent racial disparities, the study found.
“I think this is an enormous positive because for most renters, their rental payments are the single largest payment they make each month and not getting credit for rental payments in their credit prevents them from building a credit history as quickly as they could,” says Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute.
Positive rental payments
Last September, Fannie Mae began considering positive rental payment history in their automated mortgage underwriting process for single-family homes through applicants’ bank statement data. However, that program had no bearing on the renter's credit scores.
Since its launch, more than 2,800 first-time homebuyer loan applications have become eligible for purchase by Fannie Mae that otherwise would not have been, it says.
Esusu co-founder and co-CEO Wemimo Abbey knows a thing or two about being “credit invisible.”
“I grew up in the slums of Lagos, Nigeria,” he says.
When he moved to the U.S. to study at the University of Minnesota, his mother and Abbey were turned away by many banks as they had no credit history.
“We had to get a loan from a payday lender at 400% interest,” he says.
About five years ago, he co-founded Esusu with Samir Goel, a first-generation Indian American, whose parents struggled with the financial burdens of immigrating to a new country.
“We have a system that treats you like you're guilty until proven innocent,” says Abbey. “Because we didn't have this three-digit number that's called a credit score.”
Today, Esusu has close to 3 million rental units on their platform owned by companies such as Related, Camden and Goldman Sachs’ real estate division.
Of the 53,000 affordable apartments that are owned by Related Companies nationwide, 16,000 are financed by Fannie Mae, said Jeffrey Brodsky, vice chairman at Related.
The company has worked with Esusu before and expects to roll out the program for all eligible renters.
“Their program allows for tremendous measurable impact at scale, which is an unusual opportunity for us to serve the needs of our residents at the same time and measure the results of the benefits to them,” he says.
After enrolling on the Esusu platform, 10,000 of the 53,000 residents who previously did not have credit scores now have them, says Brodsky.
About 71% of the residents have seen their credit scores go up and the average resident credit score has improved by 28 points, he says.
“Two-thirds of the residents in these apartments are people of color and they have very modest incomes. And so we see a tremendous benefit at scale.”
Improving the credit score
August Ortega, a renter in Long Beach, California, has been struggling with his credit score after a series of financial setbacks including his mother’s cancer diagnosis and a job loss.
While his credit card bills piled up, one thing he didn’t fall behind on was his rental payment. But the fact that it didn’t count toward his credit score was frustrating, he says.
“It was always silly to me that it wasn't being reported because this is like a major bill," says Ortega, a fashion designer and an instructor at the Fashion Institute of Design & Merchandising in LA.
Last year, when Ortega's landlord offered the Esusu service, he signed up.
His credit score, which had plummeted to 520 is slowly on its way up now that his rental payments are being taken into consideration.
“I think it’s up to about 540,” he says. “I hope to be a homeowner someday.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
This article originally appeared on USA TODAY: Exclusive: Fannie Mae's plan bolster renters' credit scores