Every day my family rents to people who pay their rent on time, balance their budget and save responsibly. Yet when the time comes for them to buy a home, the traditional credit system does not recognize their financial discipline. According to the 2023 National Association of Realtors report, 65% of Millennials and Generation Z prefer renting over homeownership. Unlike Generation X and baby boomers, they are less likely to view a 30-year fixed mortgage as the only path to financial freedom.
For younger Americans and longtime renters now ready to transition into homeownership, the barriers can be steep. In July, Federal Housing Finance Agency Director Bill Pulte announced a significant change in the path to homeownership.
The industry often refers to people without credit cards or loan debt as "credit invisible." This underscores the inadequacy of the traditional credit system, which penalizes renters who live within their means and pay their bills on time. A 2021 VantageScore study, based on a sample of 45 million consumers, revealed diverse credit populations that traditional models fail to capture.
An example of the diverse credit populations is evident in recent reports of the drop in traditional FICO scores, the steepest since the Great Recession. This drop exposes the flaws in a system that penalizes young renters unfairly. The need for expanded metrics is clear when the FICO score of 14% of young borrowers drops 50 plus points. Under traditional scoring, this could happen from a missed student loan payment that lacks a long credit history to offset it. The steep drop comes even when the person has a stellar rental history. This is a flaw that can be overcome by taking FHFA Director Pulte's directive to use rental history, increasing not only homeownership, but the stock of affordable housing.
LOANTHINK COLUMNS ON CREDIT SCORING
For almost four decades my family has built homes for owners and renters. Over the years, we have seen an increase in the need for affordable homes in both the rental and homeownership markets. We have the unique privilege of watching individuals and families transition from renters to homeowners as their lives change.
One of my favorite couples is Jo and Jay. Their story reminds me a lot of my parents' story. They too began dating in high school, later married and began to plan for a family. They were great tenants. Responsible with their budget, they decided to buy their first home. Couples and individuals like Jo and Jay, should not be penalized for responsibly renting.
A new era of advanced analytics and artificial intelligence now improves loan default risk prediction by 8% to 10%. Machine learning combined with nontraditional data such as rent, utility and telecom payments along with trended data over 24 months provides a more accurate measure of creditworthiness. In the traditional model, consistent payments for cell phone or utility bills are ignored unless the payments are delinquent. If failure to pay indicates credit risk, it is only logical and fair that consistent payments should demonstrate creditworthiness.
According to the Consumer Financial Protection Bureau, expanding the use of nontraditional tools could significantly increase homeownership and wealth creation in America. Approximately 17 million renters could potentially be deemed creditworthy. This shift could profoundly impact builders' willingness to enter the affordable housing market. Builders are more likely to increase production of starter homes and affordable housing when there is a clear market for qualified purchasers. The fact that today's advanced analytics allows a more accurate prediction of default risks makes affordable housing even more attractive to builders.
If the goal is to reduce lender risk and increase access to homeownership, policymakers, lenders and credit bureaus should recognize the value of expanded metrics. For families like Jo and Jay and the thousands of responsible renters across the country, using expanded data could mean the start of a legacy-building chapter that strengthens families and communities for generations.
