Why banks don’t use this important factor as proof you can afford a home

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Rent payments and mortgage payments are different.


Key points

  • Mortgage payments and rent payments are made up of different costs.
  • The deposit requirements between leasing and buying are also different.
  • A recent change to Fannie Mae could help you get a mortgage if you have a rental history.

I have been a tenant for most of my adult life. It can be frustrating talking about housing costs with others and hearing how little they spend on mortgage payments compared to what I spend on rent each month. Luckily, I’ve also spent my entire adult life renting in neighborhoods with lower than average cost of living, and I’ve always been able to afford my rent.

But it does make you wonder: If a monthly mortgage payment costs less than a monthly rent payment, why don’t banks and other mortgage lenders consider rent payments on time and in full as proof that you can you afford to buy a house? One of the main reasons for this is the difference between rent and mortgage payments, and the actual amount of money needed to become a homeowner. However, there is a silver lining for some aspiring homeowners, thanks to a recent big change in the way Fannie Mae takes out home loans.

What does a mortgage payment cover?

While rent and mortgage payments both perform the same basic function of ensuring you have a roof over your head, they are not the same thing. A mortgage payment includes not only the payment used to pay off the mortgage you took out to buy the house, but also the interest on that loan. It can also include homeowners insurance, property taxes, and potentially even homeowners association (HOA) fees.

Your mortgage payment amount will depend on the cost of your home, of course, as well as the interest rate and term of your mortgage (eg, 30 years). And if you got a variable rate mortgage, your mortgage payment will likely change over time due to the tendency of the interest rate to fluctuate up or down depending on market conditions.

Your home insurance is mandatory if you purchased your home with a mortgage, as lenders require it. And even if you bought with cash, it is generally inadvisable to do without home insurance. If you’ve paid less than 20% down on a conventional mortgage, you’ll also need to pay for private mortgage insurance, or PMI. PMI does not protect the homeowner, but rather the mortgage lender; if you default on your mortgage and your lender forecloses, this ensures that the lender can recoup the costs of foreclosing and selling a home with little equity.

You will also have to pay property taxes, which are based on the assessed value of your home. These can be paid annually or split into monthly installments as part of your mortgage.

Homeownership also comes with many ongoing and sometimes unforeseen costs, as routine and emergency home maintenance is the financial responsibility of the homeowner. Need a new roof? It’s on you and your wallet.

What does a rent payment cover?

Now let’s compare mortgage costs with what it takes to rent. A major difference between buying and leasing is the deposit requirement. Landlords vary, of course, and most of my rental experience has either been with individuals who own and rent homes, or with very small property management companies. I’ve always been required to pay a refundable deposit (usually equal to one month’s rent) on a rental, and sometimes a smaller non-refundable amount for cleaning and maintenance after my lease ends and I move out. I have also always been required to give the first month’s rent upon signing a lease.

This is different from buying a home, which typically requires a larger down payment which is applied to the total cost of your home, and your mortgage is used to fund the rest of that cost. Although there are programs that offer mortgages with no or very small down payment (including FHA loans), you will need to pay for additional mortgage insurance (like the PMI mentioned above) to protect your lender, rather than you.

Ideally, home maintenance and repair costs should be paid for by your landlord. The higher amount of your rent payment compared to a mortgage payment is a reflection of this. And while tenants are strongly recommended to take out tenant insurance, the cost of it (which only covers your personal belongings in the event of an accident, such as a fire in your apartment) is much lower than that of the home insurance, which insures the entire property. , inside and outside.

Credit reports

Another huge difference between mortgage payments and rent payments is that mortgage payments are reported to the credit bureaus and will therefore appear on your credit report and be reflected in your credit score. This hasn’t always been the case with rent payments (less than 5% of US renters have their payments reported). And if you think about it, that makes sense. Since I rented most of the time to individuals, I either sent a check every month or sent rent payments through an online tenant portal or through a payment service like PayPal. There is no credit report involved, unlike the case where you make a payment on, for example, a credit card.

However, in September 2021 there was a positive change that should make it easier for some tenants to qualify for a mortgage.

Fannie Mae’s change and what it means for aspiring owners

The Federal National Mortgage Association, better known as Fannie Mae, is a GSE (government sponsored enterprise) that purchases conventional mortgages on the secondary market. Last year it announced that the automated loan underwriting service it uses can now take into account the previous 12 months of rent payments by aspiring homeowners when deciding whether to qualify for a mortgage. .

The process involves the use of bank statement data (with the applicant’s consent) to show these regular, regular payments as proof that the applicant can also pay off a mortgage, and will only be used to improve the applicant’s chances of approval . Fannie Mae data showed that 17% of rejected applicants could have been approved for a mortgage if rent payments had been taken into consideration.

This exciting change will make home ownership more possible for Americans with lower credit and possibly weaker financial backgrounds. Americans who have been blocked from homeownership are more likely to be black or Hispanic than white or Asian, so this change from Fannie Mae is a step toward much-needed racial justice and support for all Americans.