For most families, their home is their biggest asset, a way to avoid the uncertainty of rising rents and ensure a more stable future by building and transferring wealth to their children. That’s why today, despite high prices and high mortgage rates, potential first-time buyers are still dreaming and looking for their own home. Even with all the obstacles, first-time buyers make up 45% of buyers today, up from 37% last year.
Ensuring the opportunity to buy a home should be a social priority. Fortunately, the federal government is making progress to make homeownership accessible, but we need the support of the private sector to see the scale of change.
The solutions below tackle some of the biggest hurdles first-time home buyers face – and how they can help people buy their first place.
Check your rental history
For many renters, rent payments are their biggest monthly expense. It’s not a big leap to assume that a tenant making their rent payments on time can also make their monthly mortgage payments.
Fannie Mae has given lenders the ability to consider positive lease payments in auto underwriting. This is the first time the large-scale system will include positive rental history and significant development to help first-time home buyers, especially those with poor or thin credit, get their dream home. Less than a year later, Freddie Mac merged with Fannie Mae, including timely leases in underwriting.
These two government-sponsored entities underwrite most mortgages in the U.S.—and this update to underwriting criteria will affect millions of loans. In a special effort to help first-generation and first-time home buyers, the Federal Housing Administration just announced that it will include timely rent payments in the loan criteria in October 2022. Now most lenders can and should take advantage of these changes on their behalf. from that customer.
Fannie Mae projects that adding rental history to underwriting can help people who were previously unapproved get a mortgage, saying that 17% of applicants who haven’t owned a home in the past three years and weren’t approved for a mortgage, may be approved. if the rent payment history has been considered. Zillow Home Loans has begun including rental history in underwriting for qualified applicants, pulling that information directly from the applicant’s bank statement. This is a start, but we also need to ensure that there is an easy way for landlords and tenants to report their rent – and that lenders are aware of and prepared to implement these underwriting changes.
You don’t have to accumulate debt to build credit
In an age where so much data is being used to enable a variety of smart technologies, it’s worth considering why credit reports are antiquated. While privacy is critical, so is accessibility.
Our current system often requires people to accumulate debt to build a credit profile. The Consumer Financial Protection Bureau reports that nearly 11% of Americans have no credit—or don’t have enough credit to be scored by one of the major bureaus, essentially locking them out of buying a home.
An additional 8.3% of Americans have scores that are considered “unacceptable.” Black and Hispanic consumers are disproportionately more likely to fall into one of these two groups: about 15% of Black and Hispanic consumers have invisible credit compared to 9% of the white and Asian population.
Modernizing credit reports to be more inclusive, accurate, and reflective of an individual’s ability to pay a mortgage is a critical cog in a system that drives equity.
We are seeing some progress on that front. The Federal Housing Finance Agency has announced a new credit scoring model for use by Fannie and Freddie that promises to be more accurate and fair and includes rent, utility, and telecom payments. To avoid the pitfalls that led to the Great Financial Crisis, this new model will expand access for consumers (by reflecting a more holistic view of credit) and prevent additional risks for lenders.
However, none of these changes make an impact unless lenders, landlords, and others who check credit scores use and support the updated and modernized model.
First time buyers should ask for help with the down payment
Homebuying is scary even without the added concern of saving for a down payment. Housing prices and rents are not easy these days. Down payment assistance programs help qualified borrowers overcome this final, sometimes insurmountable, hurdle to buying their first home.
The challenge here is to ensure that those who are eligible for assistance know that this assistance is available. That’s why some of the country’s leading real estate portals have partnered with Down Payment Source to create a tool that, for the first time, brings visibility to the program on a simple, national platform – showing buyers of state, county, and city assistance programs. that can save you an average of about $17,000. The help program is there – it’s our responsibility to make sure our shoppers know how to use it.
There has been progress on innovation and reform that is key to helping first-time homebuyers cross the finish line and begin to address the home ownership gap among different groups of Americans. Now, more than ever, it’s time to step on the accelerator–and embracing fintech and government reform will be critical to getting us there.
Imagine if every lender saw rent payments or every rent payment platform made it easy for consumers to create credit. Home ownership rates won’t rise overnight, but collaboration between fintech and government will certainly help us get more buyers into their first homes.
Skylar Olsen, Ph.D., is chief economist at Zillow and a founding member of Zillow Economic Research. Recently, he built and supported public-facing economics and data programs in Prop/FinTech through Reimagine Economics, a consultancy he founded.
Opinions expressed in Fortune.com comment pieces are solely the opinions of the authors and do not necessarily reflect their opinions and beliefs. fortune.
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