A government change could tip the scale for millions of “credit invisible” Americans and spur hundreds of billions in new mortgage originations.

In a rule change finalized last month, government-run mortgage giants Fannie Mae and Freddie Mac said they would accept mortgages underwritten with a credit score model that takes on-time rental payments into account.

VantageScore, the company behind the credit scoring system, estimates that including rental payment history allows about 7.7 million Americans to boost their credit score above 620, potentially making them eligible for traditional mortgages.

Additionally, the company says this approach improves risk prediction by identifying up to 11% more defaults in the riskiest score ranges, potentially reducing the rate of future defaults.

The change “could make a difference for a small but growing share of borrowers: freelancers, self-employed households, gig workers, or young people and immigrants with good, reliable cash flow but a thin credit file,” says Realtor.com® senior economist Jake Krimmel. “They are are probably qualified as a whole, but not on paper under the current rigid, outdated system.”

Here’s what has changed

Fannie and Freddie buy whole loans from mortgage lenders to package as securities for investors, and the rules they set for eligible “conforming” loans have major influence on the market.

U.S. Federal Housing Finance Agency Director William Pulte, who also oversees Fannie Mae and Freddie Mac, announced April 22 that they were expanding a pilot to allow mortgage lenders to use VantageScore ratings to assess borrower creditworthiness, in addition to or instead of traditional FICO scores.

VantageScore is a scoring model developed by the three major credit bureaus, Equifax, Experian, and TransUnion. They operate it through a joint venture called VantageScore Solutions LLC. Its “trended data” takes into account rental and utility payment history reported to the bureaus.

Montana-based credit scoring mainstay FICO now also considers positive and negative rental payment history reported to the agencies in its FICO 10T.

In the announcement, Pulte framed the change as a modernization of consumer credit. Late rent and utilities payments can negatively impact credit scores, so the lack of a positive impact from payment history was “nonsense,” Pulte said.

The National Association of Realtors® and the Mortgage Bankers Association applauded the move as a modernization of credit reporting.

Tipping the scale for the ‘credit invisible’

Last year, only about 13% of renters benefited from positive rental payment history in their credit reports. California, Colorado, and New York have already enacted programs for rent reporting. Nine other states have considered legislation.

VantageScore Solutions believes almost 7.7 million Americans would see a boost to their credit if the model went nationwide. And it also believes that data helps better predict who will default and who won’t.

Young consumers’ average credit scores rise by 67 points. But some boosted by as much as 100 points, said VantageScore Chief Economist Rikard Bandebo.

The model “allows borrowers to demonstrate responsible financial behavior that legacy credit scoring models currently overlook,” Bandebo said.

In a study VantageScore conducted on 600,000 people last year, it found that about 10% of the 77 million credit-relevant renters in the country would benefit from updating the credit score. For these Americans, adding rental payment history would result in a score of at least 620, making them mortgage‐eligible under current government-sponsored enterprise (GSE) guidelines.

In fact, a fraction of these renters are “credit invisible,” meaning outside of rent history, they have no credit at all under traditional metrics. VantageScore used this data to estimate that there’s a market opportunity of 2.1 million households and $777 billion in new mortgage volume.

At the same time, positive rental payment scores could identify 11% more defaults and a 3.7% predictive lift. As Pulte said, rental payment history is indicative of mortgage payment history, giving banks a better idea of a person’s risk.

Mortgage lenders embrace the change

Pennsylvania-based mortgage lender Newrez, which originated the first $10 million in loans using this data, found the process could run very similar to its normal lending process, said Bob Johnson, head of originations at the company.

That “validated” the idea that a new credit score model can be applied using the same processes. Paired with “strong controls and underwriting discipline,” the new model provides a more holistic view of a person’s credit, Johnson said.

And it proved that Newrez’s initial experiment, or “limited engagement,” is scalable.

“For consumers, the takeaway is straightforward: Consistent on-time payment behavior across a wider range of obligations can now show up in a credit score in ways it often did not under the legacy models,” Johnson said. “That is particularly meaningful for thin-file and previously unscoreable borrowers.”

In an April 29 call, Fannie Mae acting CEO Peter Akwaboah said the move would “support affordability and access through industry innovation and competition.” Fannie Mae provided $116 billion in liquidity to 385,000 households in the first quarter. It didn’t share further details of how it would incorporate VantageScores.

An increasing number of mortgage companies have joined in. Michigan-based United Wholesale Mortgage announced April 29 it would begin accepting FICO and VantageScore, for instance. Department of Housing and Urban Development Secretary Scott Turner said it would follow with VantageScore usage “soon.”

Assessing potential risks

The economist Krimmel says that modernizing the credit scoring criteria in this way will help people with steady income but who may have a thinner credit history.

“There is some risk, though,” he says. “FHA delinquencies have increased, though that could partly reflect the fact that these ‘right’ marginal borrowers are being shut out while the wrong ones slip through.”

Still, the change happens at a time when young people are overwhelmingly pessimistic about the housing market. They blame a variety of factors, including a lack of housing supply driving up prices. Given economic uncertainty and high interest rates, the credit formula is just one factor in the larger housing puzzle.

“Most importantly though for downside risks, the economic backdrop is somewhere between uncertain and unstable,” Krimmel said. “Policies expanding the credit pool are only as sound as the labor market supporting it.”