Rental payment history is a strong indicator of how well a borrower would perform with a mortgage loan. But until this week, these data have been largely left out of the mortgage origination process. On August 11, Fannie Mae announced that, for the first time, it will allow rental payments to be incorporated into mortgage applications. This historic announcement comes at a time when wealth disparities have been widening.

Fannie Mae estimates that about 17 percent of first-time homebuyers who were initially ineligible can now be approved, provided they have a clean 12-month rental payment history. Not all mortgage originators are positioned to provide this to their borrowers on launch day. But as technology for incorporating rental payment history becomes more widely available, this expanded access to credit will make homeownership an option for significantly more households.

Under the new guidelines, lenders will submit the mortgage application through Fannie Mae’s automated underwriting system, Desktop Underwriter, just as they do now. If Desktop Underwriter finds the loan is not eligible for sale to Fannie Mae, the system will now check, for all first-time homebuyers, whether a 12-month history of on-time rental payments would change the outcome. If the loan is not eligible as submitted, but 12 months of on-time rental payments would make the loan eligible, Fannie Mae will go back to the lender to let them know, and the lender can ask the borrower to give permission for Fannie Mae to access their bank statements.

Although Fannie Mae expects a relatively small number of new mortgage approvals as this new system goes online, we expect this shift to disproportionately benefit Black and Latino borrowers, who, in part because of structural racism, tend to have lower credit scores than white borrowers.

Read the full article about mortgage originiation processes by Laurie Goodman and Jun Zhu at Urban Institute.