Are You Buying a House? How On-Time Rent Payments Affect Your Credit Score

Rent used to only affect your credit score if you missed a monthly payment. When you apply for a mortgage, missing the rent reflects negatively on your credit report.

Due to recent changes made by the federal government, mortgage finance giant Fannie Mae now allows on-time rental payments to be included in credit scoring when it comes to buying a home.

A borrower’s credit history is a key factor when evaluating their ability to make mortgage payments. Currently, less than 5% of renters have their rent payments reported on their credit bureau reports, making it challenging for many first-time homebuyers. The reason is that renters who consistently pay their landlords on time do not see that positive activity reflected anywhere, until now.

Rent not paid has an indirect impact on your credit when that debt lands at a collection agency because that is reported to the credit bureau.

Fannie Mae, the federally backed institution that buys mortgages from banks and financial institutions that size up and underwrite borrowers, announced plans to factor in regular rent payments when underwriting mortgages. Thus, your rent has more weight when it comes to obtaining financing for your dream home.

Paying your rent on time now will help you qualify for a mortgage later. But that’s not the only thing you need to do to get a home loan.

1. CHECK YOUR CREDIT REPORT AND SCORES

With a credit report monitoring service, future borrowers can check their credit report and scores to determine if they qualify for a mortgage. Credit score services offer current credit scores as well as score simulators to help determine how to improve these scores. Your credit goals can be reached by paying off credit cards and removing any inaccuracies on your credit report.

2. FIGURE OUT YOUR DTI

The borrower must calculate their debt-to-income (DTI) ratio by comparing their monthly payments with their monthly income. A borrower’s DTI cannot exceed 43% for most mortgage loans.

3. SAVE MONEY

In most cases, first-time homebuyers start with a down payment of around 3% of the home’s price. A conventional loan can be obtained by repeat buyers with as little as 5% down. In addition, borrowers should factor in closing costs, which can range from 3% to 5% of the loan amount.

Maintaining good credit is crucial when it comes to borrowing because the better your credit, the better your financing terms will be. And that is all the more critical when it comes to making a huge purchase like a home.

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