How do you buy a home with little or no credit? Turn rent payments into credit score points
Zhiqiang Su, 50, and Yuping Liang, 50, moved from China to Chicago in 2020, seeking a life with better education opportunities for their now 21-year-old daughter and more freedom.
They have been renters since they immigrated, living in a single-family, two-bedroom home in Bridgeport for $1,200 a month, never having missed or been late on a payment.
But, Su said, they want a place to call their own to help them achieve their American Dream.
“I want to purchase a house because it will allow me to have a more stable life,” Su said in Cantonese as Ivan Man and Sharon Wong, two members of his real estate team, translated.
Being immigrants, however, adds extra layers of difficulty to the already challenging housing market.
The couple works hard to make a living: Su works 10-hour days, six days a week making sushi in a restaurant, and his wife does the same while working a part-time job as a home care aide. But their real estate team expects them to run into challenges qualifying for a home loan given that they may have a limited credit profile. Typically, someone needs a credit score of 620 or higher from a traditional lender to qualify for a home loan. (The Federal Housing Administration, Su’s likely lender, requires a lower score of 580 or 500 with a higher down payment.)
For millions of people in the United States like Su and Liang, the challenges that come with buying a home escalate because they have limited to no credit, and immigrants are particularly vulnerable given that they have no credit score when they come to the U.S. Various private and federal mortgage lenders and the government-sponsored mortgage financier Fannie Mae are trying to make it easier by allowing applicants’ on-time rent payment histories and other similar payments to help them qualify for a home loan.
The Consumer Financial Protection Bureau has found 26 million Americans have no credit record, which is also known as being “credible invisible.”
Gunnar Blix, director of housing market research for real estate data provider Black Knight, said people with thin credit scores — people who don’t have a history of using credit — have compounding issues given their credit status and the lack of affordability in the housing market with higher mortgage rates and prices.
“We are seeing credit tightening, and we see that in terms of higher credit scores (required to finance a home purchase),” Blix said, adding that average credit scores for homebuyers have gone up seven points since December. Black Knight data shows that in June, average credit scores for homebuyers were 735, the highest recorded since the company started collecting the data in 2000.
The Federal Housing Administration began allowing first-time homebuyers applying for an FHA-insured mortgage to include positive rent payments — late or missed payments are not included — as an additional factor in their credit assessments in September 2022.
“If you’re regularly paying your rent on time, that’s a good indication you will also pay your mortgage on time,” Federal Housing Commissioner Julia Gordon said in a news release from September 2022. “We hope that adding this positive factor to all of the characteristics currently considered in an FHA credit evaluation will increase access to affordable FHA-insured mortgages for first-time homebuyers.”
Fannie Mae also began incorporating new methods to determine credit readiness through a change in its mortgage underwriting system and a recent pilot program.
In 2021, Fannie Mae’s automated underwriting system began considering a person’s positive rent payment history in the mortgage credit evaluation process. The system does this by allowing mortgage lenders for single-family homes to identify recurring rent payments in a person’s bank statement data, according to Fannie Mae.
In September 2022, Fannie Mae began a yearlong pilot program to help multifamily property owners report positive rent payments to the three major credit bureaus for their renters in an effort to build or boost the tenants’ credit scores. Fannie Mae partners with financial technology companies that serve as the go-betweens for property owners and credit reporting agencies and covers the multifamily property owners’ costs of collecting and reporting rent payment histories to the agencies for a year.
Priscilla Almodovar, CEO of Fannie Mae, said incorporating on-time rental payments into a consumer’s credit standing will create more housing opportunities for all.
“A home is more than shelter,” Almodovar said in a statement to the Tribune. “It defines who we are, provides stability to our communities, and promotes generational wealth.”
National real estate firm Related Companies is one organization that partners with Fannie Mae to report positive rent payments to credit reporting agencies.
Since Fannie Mae launched its pilot program, Jeff Brodsky, vice chairman of Related Companies, said his company reports on-time rent payments for more than 50,000 families nationally, with 4,600 of those families living in Related’s affordable housing portfolio in Chicago. The company works with Esusu, one of the fintech companies partnering with Fannie Mae. Esusu’s website states that only around 10% of Americans build credit through on-time rent payments.
Because of this partnership, more than 1,200 families in Chicago who didn’t have credit scores now do, according to Brodsky. He said in Chicago and nationally, more than 70% of residents have seen their credit scores improve, on average by 47 points.
The credit reporting service is provided free of charge to all residents, with 80% of Related’s residents opting to participate.
“This is improving the financial resiliency of large-scale numbers of folks who have very little options to do so with their income levels,” Brodsky said, adding that Related’s average affordable housing resident has an income of $15,000 a year. “This practice works and is scalable and is cost effective.”
While Related is not collecting information on how many residents go on to purchase a home, the company hopes to do so in the future, Brodsky said.
Su wants to buy a house by next year, with his price range between $300,000 and $380,000. His search is concentrated in the Chinatown and Bridgeport areas, two popular spots in the immigrant community, which make them competitive and less affordable markets, said Wong, managing broker and founder of Century 21 Realty Associates in Chinatown and Su’s agent.
Wong said this makes it challenging for people like Su and his wife because their debt-to-income ratio — a calculation of how much of one’s monthly income is being spent on debt payments — would be too high given the prices of homes in the areas. She said homes in Bridgeport and Chinatown sell for around $500,000. Su and his wife have a combined income of around $70,000 a year and limited savings, but they may rely on relatives to lend them money for their down payment.
This “missing middle” housing in the real estate market is not limited to Bridgeport and Chinatown but is a problem throughout the Chicago area, though the housing shortage here is not as severe compared with other U.S. markets, according to the National Association of Realtors.
Su’s mortgage lender, Bing He, said that while he has not run a credit check yet on Su given that he has not found a home he wants to buy, people typically need two lines of credit to help them qualify for a loan. Su only has one, in the form of a credit card, since last May. Su will also need to get a payment proof letter from his property management company because he pays his rent in cash, and the Federal Housing Administration typically requires bank statements to show proof of on-time rent payments.
Another lender that Wong’s office works with is Citibank, which has a bilingual office in Chinatown.
Citi Mortgage, the mortgage lending arm of Citibank, has had a “long-standing” policy to consider nontraditional credit histories, according to the company.
Brad Wayman, president and CEO of Citi Mortgage, said the company considers on-time rental payment history and utility and cellphone payments to help people achieve homeownership.
“A traditional credit profile is only one piece of the puzzle when considering a person’s ability to manage a home loan,” Wayman said in a statement. “Our message for aspiring homeowners is don’t give up hope merely for lack of traditional credit experience.”
Rocket Mortgage and Veterans United Home Loans also consider alternative forms of credit for their mortgages.
Wong also works with some local banks, including International Bank of Chicago and Royal Business Bank (formerly Pacific Global Bank), that have similar products, but they require higher mortgage rates and down payments of 35% to 50%, which is out of reach for many people, she said. Su would be her first client who she has helped qualify for a loan through alternative credit programs.
While there are many lenders who have started these programs, one of the main difficulties in reaching the immigrant community is the language barrier, Wong said. New immigrants, she said, also typically rent from smaller landlords, not larger ones like Related, making it tougher for them to use Fannie Mae’s program.
“When we hear about alternative credit, it’s just really good news for us to explore a bit more,” Wong said. Her office has been reaching out to various lenders to see how they can help more people — not only immigrants but also younger people or others who may have limited or no credit.
Su said he has a few co-workers who are running into his same challenges and would also be interested in the programs he is hoping will help him buy a home with his wife.
For Su, being a renter is something that comes with uncertainty because his landlord could ask him to leave or raise his rent. These programs will hopefully shorten his timeline to becoming a homeowner and help him become his own boss — with someone making sushi for him, he said.
While he has only been searching for a few weeks, his goal is to find a single-family house, bungalow-style with at least three bedrooms.
Su shared an old Chinese saying, which his real estate team helped translate into English: “Build your roots where you live.”
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