New lending rule reduces investment property mortgage costs

Reduced closing costs for investment property buyers

Are you buying a multifamily property to rent out? If so, you might be able to get your closing costs covered — or at least part of them

The catch? You’ll need to report your tenants’ on-time rent payments.

It’s all a part of a new initiative announced by Freddie Mac to help renters build credit. If landlords are willing to report their renters’ payments to the credit bureaus, they can get a break on their mortgage costs.

Here’s how it works.

How the new lending rule works

The new Freddie Mac program is open to multifamily home buyers only.

The company has partnered with Esusu Financial to streamline reporting from property management programs straight to Experian, TransUnion, and Equifax — the three major credit bureaus.

Those who agree to report their tenant’s on-time rent payments using Esusu’s technology will get credits toward closing costs (though the exact amount of those hasn’t been disclosed).

“This solution eliminates the administrative and compliance burden for property owners, which has been the largest hurdle facing industry efforts to report rental data.” —Freddie Mac

To be clear, landlords will still need to pay for Esusu’s reporting platform. But Freddie Mac has negotiated discounted fees for this.

Again, no exact fee has been revealed, but using Esusu’s services can help streamline the reporting process. It’s also required to be eligible for closing cost credits.

“The platform manages the end-to-end process of reporting rental payments to all three major credit bureaus while ensuring compliance with industry standards,” Freddie Mac stated.

The announcement continued, “This solution eliminates the administrative and compliance burden for property owners, which has been the largest hurdle facing industry efforts to report rental data.”

>Related: Investment property mortgage rates — How much more will you pay?

Renters will benefit, too

Freddie’s new program has far-reaching implications for renters. As on-time rent payments are reported, it helps increase the tenant’s credit score.

Esusu can even report up to 24 months of past on-time payments, “resulting in an immediate positive impact to credit scores.”

“At present, the most common way for rents to be reported to the credit bureaus is when there is a missed payment that has gone to a collections agency,” said Alexis Sofyanos, senior director of Equity in Multifamily Housing at Freddie Mac. “Freddie Mac wants to flip that script, so that renters who pay their rent on time and in full each month get credit for doing so.”

How Freddie’s plan helps renters become homeowners

For many renters, this improved credit could open the door to homeownership or even make buying a home more affordable (i.e., lower interest rates).

“Rent payments are often the single largest monthly line item in a family’s budget, but paying your rent on time does not show up in a credit report like a mortgage payment,” said Michael DeVito, CEO of Freddie Mac.

“That puts the 44 million households who rent at a significant disadvantage when they seek financing for a home, a car, or even an education. While there remains more to do, this is a meaningful step in addressing this age-old problem,” DeVito added.

Rent reporting could be the new norm

Freddie’s initiative isn’t the first aimed at helping renters build credit and become homeowners. Fannie Mae introduced a new update to its Automated Underwriting System in August that incorporated rent payment history in its underwriting process.

“Credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, but fewer than 5% of renters today have their rent payments reported on their credit bureau report, putting many prospective first-time homebuyers at a disadvantage,” Fannie Mae reported.

“Approximately 20% of the U.S. population overall has little established credit history — a group in which Black and Hispanic consumers are disproportionately represented,” Fannie Mae added.

Fannie’s rule, however, is directed solely at renters — while Freddie Mac’s new rule helps renters and the landlords who purchase investment properties.

Save money on your next rental property

If you’re looking for a way to lower the closing costs on your investment property purchase, as well as help your tenants improve their financial stations, Freddie Mac’s new initiative may be an option.

There’s no word on exactly when the initiative will go into effect, but if a new purchase is on your radar, make sure to ask your loan officer about it and look into adding Esusu to your arsenal of tools.