If you’re considering buying a home, chances are you’re not thinking much about Fannie Mae, a government-sponsored entity (GSE) that buys home loans from lenders. After all, Fannie Mae doesn’t offer mortgages directly to borrowers.

But Fannie Mae does think about you – and other borrowers hoping to become homeowners. Standards set by the GSE are instrumental in how a lender evaluates your loan application. And in early 2025, changes to Fannie Mae’s Desktop Underwriter – software lenders use to determine borrowers’ creditworthiness – could improve your odds of approval.

What is Desktop Underwriter?

Once most mortgages close, the original lender sells them. Lenders need to sell home loans on a secondary market to generate cash so that they can originate new loans for new borrowers. Fannie Mae buys a lot of those loans – around 805,000 single-family mortgages in 2023, for example.

Because it applies Fannie Mae’s criteria to analyze an application, Desktop Underwriter can help a lender understand whether the mortgage – should they approve it – will be eligible for Fannie’s purchase. Simply put, Desktop Underwriter (DU for short) tells lenders how likely it is that you’ll pay back your loan based on Fannie Mae’s standards, and thus whether they should lend you the money and what your loan terms might be.

What is underwriting? Underwriting is the process through which a lender decides to approve or deny your mortgage. During underwriting, a lender reviews and verifies all the information on a loan application, such as a borrower’s income, outstanding debts, assets and credit history. To save time, some of the process is automated. This is when tools like DU come into play. Other parts – especially dealing with information that might trigger a red flag about the borrower – are completed manually by a human professional. The underwriting analysis results not only in a decision about the loan, but also helps determine its terms: how much money to give you and at what interest rate.

What is Fannie Mae changing in Desktop Underwriter?

On January 11, 2025, Fannie Mae will launch Desktop Underwriter 12.0, with updates including:

• Additional support for verifying rent payments: The new version will help lenders verify on-time rent payments using a borrower’s credit report. Since 2021, Fannie Mae has used bank statement data to help borrowers prove past rent payments, which has shown their ability to meet financial obligations, especially those with “thin” credit files, according to Phil Crescenzo, Jr., a loan officer with Nation One Mortgage in Summerville, SC. “The buyers that have been consistent with their rental payments have gotten approvals where the same scenario without verified rent was denied,” he says.
• Giving credit to first-time home buyers: Fannie Mae’s risk models show that first-time buyers are no more likely than repeat buyers to default on their loans, and the new version of Desktop Underwriter will consider being a first-time buyer a mitigating factor.
• More favorable consideration to those with student loan debt: The new version adjusts how the system evaluates student loan debt. It reflects research that shows owners with student loan balances are less likely to default than comparable owners with debt that didn’t include a student loan balance.
• Expanding cash flow assessment: Fannie Mae will allow lenders to review any applicant’s most recent 12 months of transactions and balances. Previously, this feature was reserved for borrowers without a credit score. While most mortgage preapprovals look at a more limited timeframe – two to three months of checking and savings accounts statements – a full year of transactions can provide valuable context, particularly for anyone with an irregular income.

Who will benefit from the new Desktop Underwriter?

Desktop Underwriter’s updates should benefit certain types of applicants in particular.

Borrowers with limited or no credit history

Most lenders require borrowers to have a long credit history and a three-digit credit score for a conventional loan, which poses a big problem for many people. According to 2022 research from Experian and Oliver Wyman, a management consultant, 28 million Americans are “credit invisible” — that is, they have no credit history with the three major credit-reporting bureaus — and another 21 million have too little credit history to receive a score.

Certified Mortgage Advisor Neil Christiansen, with Churchill Mortgage in Arvada, CO, says he’s encouraged to see Fannie Mae “take a more practical approach when evaluating borrowers who have limited credit or have no credit at all” and that the latest DU release should qualify more borrowers. However, he points out that a borrower without a credit score may still have trouble coming up with the down payment.

“What the new release doesn’t address is that the down payment is usually 20 percent [or more] when a borrower is a true no-score applicant,” Christiansen says. “This is still a sticking point for some first-time home buyers and keeps them out of the market, even though they may benefit from the enhancements in the latest release.”

First-time home buyers

If you’ve been dreaming of a home, but you’re worried about your credit score, you’re not alone. According to Bankrate’s 2024 Down Payment Survey, 38 percent of aspiring homeowners believe a prospective buyer needs “excellent credit” to get a mortgage — even though most lenders require borrowers to have at least a 620 credit score (which is considered “fair”) for a conventional loan. Now that Fannie Mae will view being a first-time buyer as a mitigating factor, you may qualify for a mortgage without taking additional time to build your credit profile.

It’s worth noting, however, that improving your credit score prior to applying is still worth the work: Those with higher credit scores tend to qualify for the lowest mortgage rates available. There’s a big difference between getting approved and getting approved with a competitive borrowing cost.

Recent grads

You may be tired of seeing that monthly bill for your education. But if you have a higher proportion of student loan debt relative to other debts – a car loan or credit card balances, for example – the new Desktop Underwriter will take that into account, and be more likely to approve your application (or at least not ding you as much for that debt).

Will Desktop Underwriter’s updates make homebuying easier?

Fannie Mae’s upcoming changes may open a pathway to homeownership for certain kinds of mortgage applicants — particularly first-time home buyers, those with a heavy student-debt load or those with a limited credit history. But there’s nothing an automated system can do to solve the main challenge of the housing market – a supply shortage that means you need a six-figure salary in much of the country to afford a home.

Data from the Federal Reserve Bank of New York shows that the average rejection rate for mortgage applications grew to almost 21 percent in 2024, and Churchill Mortgage’s Christiansen points to a combination of surging sale prices, homeowners insurance and property taxes as the main culprit.

“The cost of ownership is at one of its highest marks ever,” Christiansen says. “Although wage income has increased, homeownership’s affordability is extremely low, and we see more rejections due to debt-to-income ratios exceeding guidelines.”

Still, if you’re committed to homeownership, it’s worth trying to get preapproved for a mortgage. Desktop Underwriter 12.0 won’t be a game-changer, experts agree. But its new criteria could tip the balance for some borrowers who previously might have been denied — welcome news after a difficult few years for hopeful home buyers.