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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2018

Uncloak the Financial Invisibles

Rent payments can help build credit histories for prospective homebuyers

Are you aware that more than 45 million adults in the United States have no credit score? It is not that these people have bad credit. They simply are not in the credit system.

Many mortgage originators are not familiar with this huge untapped market for first-time homebuyers because it is assumed that anyone without a credit history simply will not qualify for a home loan. Many of those included in this large unbanked segment of the population, however, are actually financially able to purchase a house, with ready cash and good-paying jobs.

These hidden first-time homebuyer prospects are eager to buy residential property and take advantage of today’s still-affordable interest rates. Unfortunately, because they do not have credit cards, auto loans, student loans or personal loans, they do not exist in the databases of the top three credit bureaus.

Expanding the box

Uncredited market segments, such as many recent college graduates, millennials, divorcees, legal immigrants and others, are financially invisible “ghosts” to lenders. Without a credit history or credit score, getting approved for a home mortgage might seem difficult, if not impossible.

Obviously, credit histories and scores are an important consideration in a creditor’s due diligence in the complicated process of approving someone for a mortgage. Forward-thinking mortgage originators and Realtors, however, are recognizing that this untapped market may be a lucrative opportunity and are pursuing creative tactics to quickly establish good credit credentials for prospective homebuyers to meet lenders’ requirements.

Concerned renters want to become first-time homebuyers because of rising rents and difficult landlords encroaching on their private spaces. These individuals are often motivated to avoid annual rent increases by researching ways to secure a 30-year, fixed-rate mortgage.

Rising rents are especially a big problem in America’s booming metropolitan markets. Many former urban dwellers have relocated to suburban or smaller communities for employment and more affordable housing options only to find that their lack of a credit history excludes them from pursuing a home purchase that they may actually qualify for in terms of income.

With interest rates still relatively low, this is a good time to buy a home and secure a 30-year, fixed-rate loan. If these uncredited renters can secure a home loan, they would save thousands of dollars in interest over time because rates are sure to rise in the coming years. This is where mortgage originators can step in and assist these prospective homebuyers in overcoming their credit-history challenges and expand business opportunities at the same time.

A helping hand

Renters (and a large number of loan originators) do not realize that monthly rent payments are eligible to be included on a credit report and used by lenders in making loan decisions. Establishing credit is critical, given it is a key metric used by lenders when deciding whether to approve a home loan.

With growing awareness, knowledgeable mortgage originators and Realtors are referring renters that come through their doors to companies that offer on-time rent-reporting services. These services disclose rental payment histories to credit bureaus, helping renters quickly create a credit history.

The online services are able to bridge the gap between renters and credit bureaus to quickly establish credit histories for individuals. This, in turn, helps mortgage originators because it provides a new tool to help their clients meet lender requirements for home loans. In fact, the referrals received by on-time rent-reporting services often come from forward-thinking originators and Realtors who are willing to wait for prospective homebuyers to build solid credit histories and scores.

These services usually offer one of two options: past reporting or ongoing reporting. With past reporting, renters can add up to two years of rental-payment history to their credit-bureau files in as little as two weeks. Renters also have the option of providing proof of ongoing on-time payments. Including this latter option allows a renter to continue building a credit history until they are ready to complete the home-loan process.  

Vet before using

Online signup is easy and the cost of using a rent- reporting service is generally inexpensive. Renters simply log onto a rent-reporting service website and fill out a short application that authorizes their landlord or property-management company to confirm proof of on-time monthly rental payments. The rent payments are then reported to the credit bureaus, enabling consumers to generate a credit history and score.

Some originators may question whether rent payments alone can quickly establish an acceptable credit history. Thanks to social media, such as Facebook, Google and Yelp, there are hundreds of internet reviews for rent-reporting services. Customers of services are sharing personal accounts about how their credit situation changed for the better as a result of using rent-payment reporting and how they were able to qualify for a home mortgage.

On-time rent-payment services offer varying levels of money-back guarantees that should be compared when selecting which service to use, and originators should advise individuals to thoroughly vet the rent-reporting service to ensure it is not a scam. One way to do that is to check with the credit bureaus to ensure the reporting service is legitimate.

•  •  •

Mortgage originators now have a useful tool for turning once credit-challenged applicants into viable homebuyers with solid credit histories. Progressive originators are learning how to use these rent- payment services as a marketing tool to attract new prospects. Helping these qualified candidates purchase their dream homes can be a rewarding opportunity for mortgage originators and Realtors searching for unique ways to grow their business.


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