Do most of your clients check their credit score before getting pre-approved for a mortgage?

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With the passage of SB 1157, tenants in multi-family developments receiving government assistance will have a new way to add to their credit histories. Longer and more robust credit histories help potential homebuyers build up their credit scores, necessary to qualify for a mortgage without undergoing manual underwriting.

For leases entered into beginning July 1, 2021 through July 1, 2025, landlords of assisted housing developments in California will need to give tenants the option to have their rental payments reported to at least one consumer reporting agency that resells or furnishes rental payment information to a nationwide consumer reporting agency. [Calif. Civil Code §1954.06]

An assisted housing development is a multi-family rental housing development which receives government assistance. [Calif. Gov. Code §65863.10(a)(3)]

Landlords are exempt who manage a building containing 15 or fewer units, unless the landlord:

  • owns more than one assisted housing development; and
  • is a:
    • real estate investment trust (REIT);
    • corporation; or
    • a limited liability company (LLC) in which at least one member is a corporation. [CC §1954.06(j)]

The landlord needs to offer tenants the rent reporting option for leases beginning July 1, 2021 and annually thereafter. [CC §1954.06(b)]

The landlord’s offer to report rent payments needs to include:

  • the statement that reporting of the tenant’s rental payment information is optional;
  • the names of each consumer reporting agency to which rental payment information will be reported;
  • a statement that all of the tenant’s rental payments will be reported, regardless of whether the payments are on time, late, or missed;
  • the amount of any fee charged for the reporting, not to exceed the lesser of $10 a month or the landlord’s actual reporting costs;
  • instructions on how to submit the written election of rent reporting to the landlord by mail;
  • a statement that the tenant may opt into rent reporting at any time following the initial offer by the landlord;
  • a statement that the tenant may stop rent reporting at any time, but they will not be able to resume rent reporting for at least six months after their election to opt out;
  • instructions on how to opt out of reporting rental payment information; and
  • a signature block for the tenant to date and sign to accept the offer of rent reporting. [CC §§1954.06(c); 1954.06(f)]

If a tenant fails to pay a reporting fee required by the landlord:

  • it shall not be cause for termination of the tenancy;
  • the landlord shall not deduct the unpaid fee from the tenant’s security deposit; and
  • if the fee remains unpaid for 30 days or more, the landlord may stop reporting the tenant’s rental payments and the tenant shall be unable to elect rent reporting again for a period of six months from the date on which the fee first became due. [CC §1954.06(g)]

The long, slow overhaul of credit scores continues

Credit scores receive a huge amount of attention from lenders, and yet, lenders are not beholden in any concrete way to credit reporting agencies. They are not codified in our legal system, yet the mortgage market treats credit scores as law.

The current credit score model is mostly dictated by Fair Isaac Corporation (FICO), and is calculated by each individual’s:

  • payment history (35%);
  • amounts owed (30%);
  • length of credit history (15%);
  • types of credit used (10%); and
  • credit inquiries or new accounts opened (10%).

But this model leaves out a significant portion of the population who have non-traditional credit histories. In other words, these people don’t have credit cards or auto loans, but they do likely pay rent or have a cell phone plan. There is a small effort to include these nontraditional credit histories in the underwriting process, but it involves manual underwriting, which is time-consuming and avoided by many lenders.

However, in order to take advantage of positive payment history, landlords and creditors need to report these payments to credit reporting agencies. This process can be cumbersome and unreliable for applicants, making non-traditional credit difficult to actually use in scoring.

With the changes made by SB 1157, some California renters take one step closer to filling out their credit histories. For the rest, access to credit remains limited.

Considering their significance in getting approved for a mortgage, and at what terms, credit scores get relatively little attention from homebuyers. When first tuesday last ran the poll at the top of this article in 2016, just 44% of agents said most of their homebuyer clients check their credit reports before applying for a mortgage.

Real estate agents need to discuss credit scores with their clients right away, before the home search even begins. Your clients have access to a free annual credit report, so there’s no reason they shouldn’t head into discussions with their lender unprepared. And when their credit scores are unavailable due to a lack of credit history, manual underwriting is still a possibility they can discuss with their lender.