Importance Of Verification Of Rent And Payment Shock

The Importance Of Verification Of Rent And Payment Shock For Borrowers:

Most home buyers rent their apartment or home from a private landlord and pay monthly rent.  Unfortunately, majority of renters do not religiously pay their monthly rent payments consistently with a bank check.  Most renters do not realize the importance of paying their rent with a bank check.  Some renters pay their rental payments with check some months, cash other months, wire transfer other months, and some even endorse their paychecks over to their landlords. Lenders consider rental verification as a compensating factor. The only way you can provide proof of rent is by providing your lender with 12 months of on time canceled checks or bank statements. A cash receipt from your landlord does not count.

Importance Of Verification Of Rent In Determining Payment Shock

Verification of rent is one of the most important compensating factors you can provide a mortgage lender.  Rental Verification carries a lot of weight in the mortgage approval process.  Many renters pay their rents on time to their landlords, but, unfortunately, do not pay their rent payment with a check.  Proof of rent can only be used and proven if the mortgage loan borrower can provide at least 12 months of on time cancelled checks to their landlord.  Cash and getting a signed receipt by the landlord does not count as proof of VOR.   Money orders are fine as long as you have 12 months of consecutive money order receipts but you need to show that the money order funds was withdrawn from your bank.  Wires are fine as long as you can provide bank statements leaving your bank account to your landlords account for the past 12 consecutive months.  One payment that is paid cash during a 12 month interval can not be accepted by the mortgage underwriter.  Again, if you are paying your rent to your landlord on a timely basis, please pay by check.

Renting From Property Management Company And Importance Of Verification Of Rent

If you are renting a home or apartment from a registered property management company, your lender can provide a VOR form to your property management company. The form needs to be completed by the property manager, signed and dated. The completed signed VOR form can be used in lieu of canceled checks and/or 12 months bank statements.

Why Verification Of Rent Is Important

Importance of  Verification of Rent is crucial because it determines the payment shock new home buyer will end up with.

  • For example, if you are paying $1,000 in monthly rent and your new mortgage payment ( principal, interest, taxes, insurance ) is $1,000, there is no payment shock. 
  • The difference between your current rent payment and new housing payment is zero so there is no payment shock.
  • Lenders will see that you are a good risk because if you are able to afford your rent payments and pay them on time, you should be able to afford your new mortgage payment.
  • If your new proposed housing payment is $1,200 and your monthly rent is $1,000, your payment shock is 20%. 
  • A 20% payment shock is not too bad.
  • This eliminates risk and mortgage underwriters view it that you can easily ease from paying rent to paying your new mortgage payment.
  • What mortgage lenders are concerned with is if you are not paying rent and all of a sudden you are stuck with a huge housing payment that you are not used to.
  • Verification of rent is normally required on cases where borrowers have lower credit scores or bad credit or when the Automated Underwriting System conditions it.
  • Not all borrowers are asked to provide VOR.
  • All manual underwriting requires rental verification.

Cases Where Verification Of Rent Is Mandatory

There are cases that verification of rent is mandatory and your mortgage loan approval will not happen if you cannot provide verification of rent. 

  • Majority of residential mortgage lenders require that you get an automated approval per DU FINDINGS or LP FINDINGS via the Automated Underwriting System in order to proceed with your mortgage approval process. 
  • There are cases where the readings from DU FINDINGS require verification of rent. 
  • Whatever DU FINDINGS state on your approve/eligible DU FINDINGS needs to be met. 
  • If DU FINDINGS requests verification of rent, then you must provide rental verification or else, your approve/eligible DU FINDINGS is null and void. 
  • This creates many problems for renters who have been timely with their monthly rental payments to their landlords but did not pay it by a bank check and cannot produce 12 months cancelled checks.

Alternatives If Approve/Eligible DU FINDINGS Require Rental Verification

If you do not have rental verification and got an approve/eligible per DU FINDINGS and DU FINDINGS is requiring verification of rent that can be an issue.

  • Whatever conditions that DU Findings state on your automated approval, you need to provide.
  • If DU requests VOR, you need to provide VOR.
  • Reason that DU is conditioning rental verification is because your credit profile may be weak such as having credit scores under 620 FICO, high balance credit cards, large amount of collections/charge off accounts, high debt to income ratios, or other credit/income/asset issues.
  • Your loan officer can see if he or she can manipulate DU such as adding more assets or other forms of creative techniques to see if DU can eliminate the request of rental verification.
  • Another alternative to a solution to avoid VOR is by having your mortgage loan originator see if he or she can submit your mortgage package to Freddie Mac’s version of the Automated Underwriting System, LP, and see if LP FINDINGS will require verification of rent. 
  • Many times, Freddie Mac will not require verification of rent when Fannie Mae does. 
  • Whenever I get an approve/eligible per DU FINDINGS and they require verification of rent and the mortgage loan borrower cannot produce 12 months cancelled bank checks paid to his or her landlord, I run their mortgage application package to Freddie Mac’s LP and see if LP FINDINGS waives verification of rent. 
  • If we get an approve/eligible per LP FINDINGS with no verification of rent required, we can proceed with the mortgage approval process.  
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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