Recently, FHA quietly rolled out a new feature that was largely missed by major media: on-time rent payment history can now help first-time buyers qualify for a mortgage.
Officially known as the “Positive Rental History” feature, it could help many buyers change their denied loan into an approved one.
What is the “Positive Rental History” rule?
Under the new rule, FHA added a checkbox, so to speak, in their computerized underwriting system that is used to analyze all FHA loans.
Lenders can now check the box in the system indicating the borrower’s on-time payments for the past 12 months.
Prior to this change, FHA had no option to enter such information in its system, called TOTAL. The applicant could have perfect rental history for years but a weak credit history, and be denied.
Credit bureaus, for the most part, do not receive rental history from landlords. Because computerized underwriting systems are only programmed to read the credit report, they can’t consider rental history. Until now.
The former system left out perhaps the most important indicator of whether someone would pay their mortgage: their rent payment history.
Now FHA allows lenders the option to verify and use positive rental history as part of the overall computerized approval process.
How to use strong rental history to qualify for FHA
To take advantage of this feature, you must:
- Be purchasing a home
- Be a first-time homebuyer, meaning you haven’t owned a home in three years or are a departing ex-spouse who is buying again
- Show 12 months of full, on-time rental payments of at least $300 per month
- Have a credit score of 620 or higher
If you meet these criteria, the lender can collect one of the following documents to prove positive rental history:
- Written verification of rent form from the landlord
- 12 months canceled checks
- 12 months bank statements
- A landlord reference from a rental management company
- If renting from family, a lease agreement and 12 months canceled checks or bank statements
When your loan officer verifies you meet the requirements, they will run your scenario through FHA’s computerized TOTAL system indicating “positive rental history.” This indicator could help you get approved even if you have less-than-perfect credit, lack of credit, or thin credit history.
How positive rental history can help you become approved
Here’s an example of how this change can affect the outcome of your approval.
Let’s say you have a credit score of 630. Not terrible, but not as strong as it could be. On top of that, you haven’t used credit extensively.
The loan officer runs your scenario through FHA’s TOTAL system and receives a denial.
Your loan officer asks you about your rental history, which has been perfect for over 12 months. He collects 12 months of bank statements showing on-time, full rental payments for a year.
He then re-runs the computer program, this time indicating “positive rental history” in the system. It returns an “approved” result.
While not every scenario will work out so cleanly, it is always worth exploring this option. You’ve earned it if you’ve paid your rent on time.
Will negative rental history hurt my chances of approval?
No. Your lender has the choice to indicate positive rental history, but there’s no button to indicate negative history.
While you won’t be able to use rental history to boost chances of approval, some late rent payments won’t hurt your chances unless you are using non-traditional credit to qualify.
Similar efforts from other mortgage agencies
Both Fannie Mae and Freddie Mac, the two major conventional loan agencies in the U.S. are going about the issue a different way.
They provide large apartment complex landlords and property owners to report rental history directly to the three credit bureaus, Equifax, Experian, and TransUnion.
In years to come, you may automatically benefit from paying rent on time if you live in an apartment building.
Not usually. Underwriters leave it up to the loan officer and processing staff to collect verification of rent forms from landlords. If they see something suspicious, they might request further documentation from the loan officer.
No. This feature is only available with FHA loans. All major loan types use their own computerized underwriting systems and the rental history indicator has only been added to FHA’s system, called TOTAL.
Yes, if you are applying for FHA and meet criteria. Lenders can indicate positive rental history within FHA’s system which will help your chances of approval.
Apply for an FHA loan to see if you qualify
If you’ve been denied in the past, but have strong rental history, you could now be approved.