Mortgage

New lending regime lowers funding property mortgage prices

Reduced closure costs for investment property buyers

Are you buying an apartment building for rent? If so, you may be able to cover your closing costs – or at least some of them

The catch? You must report the timely rental payments made by your tenants.

This is all part of a new initiative Freddie Mac announced to help tenants build credit. When landlords are ready to report their tenants' payments to the credit bureaus, they can cut their mortgage costs.

This is how it works.

Check the eligibility of your investment property. Start here (11/9/2021)

This is how the new lending rule works

The new Freddie Mac program is only available to apartment buyers.

The company has partnered with Esusu Financial to streamline property management program reporting directly to Experian, TransUnion and Equifax – the three major credit bureaus.

Those who agree to report their tenant's on-time rental payments using Esusu's technology will receive credits for closing costs (although the exact amount has not been disclosed).

"This solution removes the administrative and compliance burden for property owners that has been the biggest hurdle in the industry's efforts to report rental information." – Freddie Mac

To be clear, landlords will still have to pay for Esusu's reporting platform. But Freddie Mac has negotiated reduced fees for it.

Again, an exact fee has not been disclosed, but using Esusu's services can help streamline the reporting process. It is also required to be eligible for acquisition cost credits.

"The platform manages the end-to-end process of reporting rental payments to all three major credit bureaus while ensuring compliance with industry standards," said Freddie Mac.

The announcement goes on to say, "This solution removes the administrative and compliance burden for property owners that has been the biggest hurdle in the industry's efforts to report rental data."

> Related: Investment Property Mortgage Interest – How Much More Are You Paying?

Tenants also benefit

Freddie's new program has a profound impact on tenants. Since on-time rental payments are reported, this helps increase the renter's creditworthiness.

Esusu can even report up to 24 months of on-time payments in the past, "which has an immediate positive impact on creditworthiness."

"Currently, the most common way rents are reported to credit bureaus when a missed payment goes to a debt collection agency," said Alexis Sofyanos, Freddie Mac's senior director of equity in multifamily housing. "Freddie Mac wants to turn this script around so that renters who pay their rent on time and in full each month can get credit for it."

How Freddie's Plan Helps Tenants Become Homeowners

For many tenants, this improved loan could open the door to owning a home or even make home buying more affordable (i.e., lower interest rates).

"Rent payments are often the single largest monthly item in a family's budget, but paying rent on time doesn't show up on a credit report like a mortgage payment," said Michael DeVito, CEO of Freddie Mac.

“This puts the 44 million households that rent at a considerable disadvantage when it comes to financing an apartment, a car or even training. While there is more work to be done, this is a sensible step to address this age-old problem, ”added DeVito.

Rental reporting could be the new norm

Freddie's initiative isn't the first to aim at helping tenants build credit and become homeowners. Fannie Mae introduced a new update to its automated underwriting system in August that incorporated rental payment history into its underwriting process.

"Credit history is a key element in assessing a borrower's ability to make a mortgage payment, but less than 5% of renters today have rental payments on their credit report, penalizing many potential first-time home buyers," Fannie Mae reported.

"Approximately 20% of the total US population has a poorly established credit history – a group that disproportionately affects Black and Hispanic consumers," added Fannie Mae.

However, Fannie's rule is aimed solely at renters – while Freddie Mac's new rule helps renters and landlords who buy investment properties.

Save money on your next rental property

If you're looking for a way to lower the closing costs of your home purchase and help your tenants improve their finances, Freddie Mac's new initiative could be an option.

It's not known exactly when the initiative will go into effect, but if a new purchase is on your radar, ask your loan officer about it and see if you'd like to add Esusu to your tool arsenal.

Confirm your new plan (November 9, 2021)

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