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- The “credit invisible” — who are disproportionately borrowers of color — often have trouble getting a mortgage.
- New Fannie Mae changes aim to make access to mortgage financing more equitable.
- Lenders can now look at bank statements to evaluate whether borrowers have the cash flow to afford a mortgage payment.
Fannie Mae, one of the largest buyers of mortgages in the US, recently made updates to its automated underwriting system to make getting a mortgage more accessible to borrowers who don’t have a credit score.
This change is part of Fannie Mae’s Equitable Housing Finance Plan, a three-year effort to improve equity in housing. Because Black and Hispanic homebuyers are less likely to have a credit score than their white counterparts — often as a result of systemic racism — it’s harder for these groups to get approved for a mortgage. As a consequence, they aren’t able to build generational wealth in the same way that white families are.
But with these new changes, which allow mortgage lenders to use data from a borrower’s bank statements to help establish creditworthiness, those who have no credit score may have an easier time qualifying for a mortgage.
These changes only affect borrowers who have no score, meaning that those who do have a credit score will still be evaluated based on whether their score meets minimum requirements.
Fannie Mae’s new underwriting enhancements
Fannie Mae doesn’t originate mortgages, but it sets guidelines for the mortgages it purchases. As a major purchaser of conforming loans, this means that lenders now have a new, simple way to evaluate borrowers who have no credit score.
With these changes, lenders can use bank statement data to evaluate a borrower’s cash flow through Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), which lenders use to see if a loan is eligible for approval and can be sold to Fannie Mae. In cases where bank statement data is provided, DU will look at things like purchase patterns and account balance trends to assess risk.
“The reason we did this is that our research has shown that assessing a borrower’s cash flow activity through bank statement data can make more predictive risk assessments,” said Malloy Evans, executive vice president and head of single-family business at Fannie Mae.
Because this process is automated through DU, getting a mortgage with no credit score is simpler for both the lender and the borrower, and it makes it easier for lenders to offer this capability.
Evans said that these enhancements are a way of seeing those who are “credit invisible,” meaning they don’t have a credit history with any of the three main credit reporting agencies.
Many of those who are credit invisible would otherwise be ideal borrowers, but because they don’t have a traditional credit score, they often have trouble getting a mortgage. That’s why Fannie Mae has been looking for new ways to evaluate these borrowers.
“This is a way to see creditworthy borrowers that are ready and able to be successful homeowners today,” Evans said.
Black and Hispanic homebuyers are more likely to be ‘credit invisible’
Black and Hispanic borrowers face more obstacles to homeownership than white borrowers do. Often, one of these obstacles is proving their creditworthiness.
“Black and Latino consumers are disproportionately represented in that credit invisible population,” Evans says.
Around 15% of Black and Hispanic consumers are credit invisible, compared with just 9% of white consumers, according to the Consumer Financial Protection Bureau.
Because homeownership is one of the main ways in which middle class Americans build wealth, not being able to get a mortgage keeps these borrowers from achieving the financial security that home equity can provide.
How to get a mortgage with no credit score
“We’re really trying to give visibility to folks that don’t have a credit score and give them credit for their income and money management practices because we think those are key elements in evaluating a homeowner’s ability to make the mortgage payment,” Evans said.
If you want to qualify for a mortgage under these new guidelines, you’ll need to provide a year’s worth of recent statements from any checking, savings, or investment accounts you have.
Even with these changes, getting a mortgage with no credit score can still be tricky, so you’ll want to make sure that the rest of your finances are in a good spot. Generally, this means that your debt-to-income ratio is no higher than 50%, and that you have a sufficient down payment. You may be able to put as little as 3% down, though some lenders may require more.
Fannie Mae also allows lenders to establish a borrower’s nontraditional credit history using payment history for other types of financial obligations, including rent, utilities, insurance, and other obligations.
Just because you don’t have a traditional credit score doesn’t mean it’s impossible to get a mortgage and purchase a home. And with innovations like Fannie Mae’s, it’s likely going to continue getting easier for borrowers who have no score but are otherwise creditworthy.
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