FHA Urges Lenders to Consider Positive Rental History When Assessing Mortgage Eligibility

In a policy change, FHA will now include a first-time homebuyer’s positive rental history when determining mortgage eligibility.

By , Attorney

On September 27, 2022, the Federal Housing Administration (FHA) published a mortgagee letter to lenders urging them to include applicants' positive rental payment histories in applications for FHA-insured mortgage loans. (Mortgagee letters provide guidance to lenders that make FHA-insured loans.)

This new FHA policy aims to help first-time homebuyers improve their chances of approval when applying for a mortgage. Federal Housing Commissioner Julia Gordon said, "If you're regularly paying your rent on time, that's a good indication you will also pay your mortgage on time."

What Is an FHA-Insured Loan?

The FHA, part of the U.S. Department of Housing and Urban Development (HUD), insures certain loans. FHA-insured mortgages are available to borrowers with low credit scores. People with FICO scores as low as 500 can potentially qualify. But if your score is 580 or higher, you'll qualify for the lowest down payment (3.5% of the purchase price). If your scores are lower, your down payment would be 10%.

FHA insurance comes into play if:

  • you don't make the mortgage payments or violate the loan agreement in some other way and
  • your house isn't worth enough to repay the lender in a foreclosure sale.

The FHA insurance pays the lender for the loss.

Positive Rent Payments Can Help You Qualify for an FHA-Insured Mortgage

Now, FHA will allow the inclusion of a first-time homebuyer's positive rental payment history as an additional factor in the credit assessment performed to determine eligibility for an FHA-insured mortgage.

For rental payments to count toward a mortgage application:

  • the transaction must be a purchase transaction
  • at least one borrower must be a first-time homebuyer
  • the minimum decision credit score must be at least 620 (the "minimum decision credit score" is based on HUD criteria and is used to determine eligibility for an FHA-insured mortgage), and
  • at least one borrower has a documented positive rental payment history with on-time monthly payments of $300 or more for the prior 12 months. Rental payments made in the month they were due are considered "on time."

What Is a First-Time Homebuyer for Purposes of This Policy?

A "first-time homebuyer" is someone who hasn't had an ownership interest in another property in the three years before the case number is assigned.

If you're divorced or legally separated and had no ownership interest in a principal residence, other than a joint ownership interest with a spouse, during the three years before a case number assignment, you're considered a first-time homebuyer for the purposes of this policy.

When Does the FHA Policy Go Into Effect?

Lenders may begin indicating a borrower's positive rental payment history in the TOTAL Mortgage Scorecard for scoring events on or after October 30, 2022, and for case numbers assigned on or after September 20, 2021. (FHA uses the TOTAL Mortgage Scorecard to evaluate a borrower's credit history and mortgage application information when underwriting loans.)

Effective date: October 30, 2022