Fannie Mae to Stop Requiring Pay Stubs for Mortgage Approval

Published

November 24, 2015

Jeanine Skowronski is the former Executive Editor of Credit.com. Her work has been featured by The Wall Street Journal, American Banker, TheStreet, Newsweek, Business Insider, Yahoo Finance, MSN, Fox Business, Forbes, CNBC and various other online publications. Follow her at @JeanineSko

Fannie Mae is trying to make the mortgage application process a bit easier for consumers (and financial institutions). The mortgage giant announced earlier this week that it will permit lenders to use verified employment and income information and trended credit card data supplied by the credit bureau Equifax in its underwriting processes beginning mid-2016.

That means that prospective homebuyers may no longer have to submit pay stubs when they apply for a home loan — a longstanding requirement of mortgage lenders. It also means consumers previously shut out of the housing market due to thin or so-so credit files may be able to get approved for a mortgage.

How Does Alternative Data Work?

Trended credit card data, which will also be provided for mortgage applications by TransUnion, provides lenders with a wider snapshot of borrowers’ spending habits. Financial institutions can see, for example, not just whether a person pays on time or what their balance currently is, but how much of a payment they are actually putting toward an account each month. These figures could make certain borrowers more appealing to lenders.

TransUnion estimates about 26.5 million consumers whose data can’t be scored under traditional models will have scores using its trended data, and 3 million of them fall into the prime or superprime categories.

Fannie’s Mae support of these alternative data sources could spur widespread adoption in the mortgage market, given the government-sponsored mortgage financing company and its counterpart Freddie Mac buy, sell and back the home loans lenders make directly to consumers.

The mortgage giant has been steadily working toward widening lending standards in a stringent mortgage market. It previously launched HomeReady, a home loan program that lets low-income borrowers, among other things, include incomes from consumers who will be living in the home but not on the loan (such as a parent) to meet underwriting requirements.

Improving Your Odds

For now, you can increase your odds of securing a mortgage by keeping your debt obligations below 43% of your annual income (the debt-to-income requirement associated with qualified mortgages) and your credit score above a 620 (Fannie Mae’s minimum score requirement.)

Of course, when it comes to credit scores, the higher, the better, since a stellar one will qualify you for the best mortgage rates. As such, you may want to check your credit before you apply for a home loan. You can pull your free annual credit reports at AnnualCreditReport.com and see your credit scores for free each month on Credit.com.

If your score is in need of a boost, you may want to pay down any high credit card balances, check for errors and limit credit inquiries ahead of homebuying season.