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For most families, a home is their single largest asset, a way to avoid the uncertainty of rising rents and ensure a more stable future by building and transferring wealth to their children. It’s why today, despite high prices and high mortgage rates, potential first-time buyers are still dreaming and searching for a home of their own. Even with all the hurdles, first-time buyers make up 45% of shoppers now, up from 37% last year.
Ensuring opportunities to buy a home should be a social priority. Fortunately, the federal government is making progress to make homeownership accessible, but we’ll need broad support from the private sector to see these changes scale.
The solutions below address some of the biggest barriers many first-time home buyers face–and how we can help people buy their first place.
Make rent history count
For many renters, their rental payment is their biggest monthly expense. It’s not a big jump to assume a renter making on-time rent payments could also make on-time monthly mortgage payments.
Fannie Mae has given lenders the ability to consider positive rent payments in automated underwriting. This marked the first time a large-scale system will include positive rental history and a significant development toward helping first-time home buyers, especially those with no or thin credit, achieve their dream home. Less than a year later, Freddie Mac joined Fannie Mae, including on-time rent in its underwriting.
These two government-sponsored entities guarantee most mortgages in the U.S.–and these updates to underwriting criteria will impact millions of loans. In an effort to specifically help first-generation and first-time homebuyers, the Federal Housing Administration just announced that it would include on-time rent payments in loan criteria in October 2022. Now most lenders can and should take advantage of these changes on behalf of their customers.
Fannie Mae projects that adding rental history to underwriting could help those who previously were not approved get a mortgage, citing that 17% of applicants who had not owned a home in the past three years and were not approved for a mortgage, could have been approved if their rental payment history had been considered. Zillow Home Loans has begun including rental history in its underwriting for qualified applicants, pulling the information directly from applicants’ bank statements. This is a start, but we also must ensure there are easy ways for landlords and renters to report rent–and that lenders are both aware of and ready to implement these underwriting changes.
You shouldn’t have to accumulate debt to build credit
In an age when a trove of data is used to enable a broad range of smart technologies, it’s fair to wonder why credit reporting is so antiquated. While privacy is critical, so is accessibility.
Our current system often requires people to accumulate debt in order to build a credit profile. The Consumer Financial Protection Bureau reports that nearly 11% of Americans are credit invisible–or don’t have enough credit to be scored by one of the major bureaus, essentially locking them out of homebuying.
An additional 8.3% of Americans have scores that are considered “unscorable.” Black and Hispanic consumers are disproportionately more likely to fall into either of these two groups: about 15% of Black and Hispanic consumers are credit invisible compared to 9% of the white and Asian population.
Modernizing credit reporting to be more inclusive, accurate, and reflective of an individual’s ability to afford a mortgage is a critical cog in a system that drives equality.
We are seeing some headway on that front. The Federal Housing Finance Agency has announced new credit score models for use by both Fannie and Freddie that promise to be more accurate and equitable and include rent, utilities, and telecom payments. To avoid the pitfalls that led to the Great Financial Crisis, these new models would both expand access for consumers (by reflecting more holistic creditworthiness) and prevent additional risk to lenders.
However, none of these changes make an impact unless lenders, landlords, and others reviewing credit scores use and advocate for updated and modern models.
First-time buyers should get assistance with down payments
Homebuying is intimidating even without the added concern of saving for a down payment. Today’s home prices and rents don’t make it any easier. Down payment assistance programs help otherwise qualified borrowers to overcome this final, sometimes insurmountable, hurdle to purchasing their first home.
The challenge here is ensuring those who qualify for assistance are aware that this help exists at all. This is why some of the nation’s leading real estate portals have partnered with Down Payment Resource to create a tool that, for the first time, brings visibility to these programs on easy and national platforms- showing buyers the state, county, and city assistance programs that can save them an average of about $17,000. Assistance programs are out there–the onus is on us to ensure shoppers know how to leverage these programs.
There has been progress on innovations and reforms that are key to helping those on the cusp of buying their first home get over the finish line and starting to address the homeownership gap among different groups of Americans. Now, more than ever, it’s time to hit the accelerator–and embracing fintech and government reform will be critical in getting us there.
Imagine if every lender looked at rental payments or every rental payment platform made it easy for consumers to build credit. The homeownership rate won’t increase overnight, but collaboration between fintech and government will certainly help us get more buyers into their first homes.
Skylar Olsen, Ph.D., is the chief economist at Zillow and is a foundational member of Zillow Economic Research. Recently, she built and supported public-facing economic and data programs in Prop/FinTech through Reimagine Economics, a consultancy she founded.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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