One of the greatest disappointments prospective homebuyers face is having their application declined by lenders because of their lack of credit history. Mortgage guarantor Fannie Mae will be rolling out a new underwriting system in mid-December, making homeownership a possibility for many Americans who previously did not qualify for a mortgage.
Fannie Mae recently announced changes to its underwriting system that will expand eligibility requirements for mortgage applicants lacking qualifying credit scores. The lender believes this will support underserved borrowers — many considered “credit invisible” — a term used to describe people with very little documented credit history and few credit scores or whose credit history is not a reflection of their debt repayment.
“We believe consumers should benefit from their responsible money management habits and a steady stream of income when buying a home, even if they don’t have an established credit history,” Malloy Evans, executive vice president and head of single-family business at Fannie Mae, said in a press statement. “Traditional lending practices make it hard for borrowers with no credit score to access credit, so we’ve taken steps that may help them responsibly qualify for a home loan using data that provides a more holistic view of how they manage their money.”
What Does It Mean To Be Credit Invisible?
Credit invisibility impacts an estimated 26 million Americans. Without having an established credit history with the three major credit bureaus — TransUnion, Equifax and Experian — consumers do not have a credit report that reflects their ability to repay loans and lines of credit. As a result, lenders will not be able to fully evaluate someone who is credit invisible, leaving them unable to gain access to large loans such as mortgages.
According to the Consumer Financial Protection Bureau (CFPB), an estimated 15 percent of Black and Latino Americans are deemed credit invisible, compared with 9 percent of their white and Asian counterparts. This number of Black and Latino Americans with credit invisibility impacts their access to credit and adequate housing.
Without having bank statements and credit reports, mortgage lenders often cannot verify a prospective borrower’s assets and approve them for a loan.
The Fannie Mae Approach
Fannie Mae has conducted research showing that evaluating a borrower’s cash flow activity through bank statements can support their predictive risk assessments — especially for consumers with credit invisibility.
As a result, the lender has been able to develop initiatives in their underwriting to evaluate borrowers with little to no credit history established. These enhancements will allow consumers to qualify for a home by evaluating a 12-month cash flow. As a result, historically underserved potential borrowers have the ability to access credit, allowing them to gain approval for mortgages.
