Importance Of Verification Of Rent And Payment Shock
This BLOG On The Importance Of Verification Of Rent And Payment Shock Was UPDATED On February 7th, 2019
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, the 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 the following:
- check some months
- cash other months
- wire transfer other months
- 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 a lender with 12 months of on-time canceled checks or bank statements
- A cash receipt from your landlord does not count
In this article, we will cover and discuss why rental verification is very important and considered a compensating factor by lenders.
Importance Of Verification Of Rent In Determining Payment Shock
Verification of rent is one of the most important compensating factors you can provide a 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 borrower can provide at least 12 months of on-time canceled 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- But need to show that the money order funds were withdrawn from the bank
- Wires are fine as long as you can provide bank statements leaving bank account to 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, renters paying rent to the landlord on a timely basis, please pay by check
Renting From Property Management Company And Importance Of Verification Of Rent
Renters renting a home or apartment from a registered property management company, lender can provide a VOR form to 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, renters paying $1,000 in monthly rent and new mortgage payment ( principal, interest, taxes, insurance ) is $1,000, there is no payment shock
- The difference between current rent payment and new housing payment is zero so there is no payment shock
- Lenders will see that borrowers are a good risk
- This is because if they are able to afford rent payments and pay them on time, they should be able to afford new mortgage payment
- If new proposed housing payment is $1,200 and monthly rent is $1,000, payment shock is 20%.
- A 20% payment shock is considered high
- This eliminates risk and mortgage underwriters view it that borrowers can easily ease from paying rent to paying new mortgage payment
- What lenders are concerned with is if borrowers are not paying rent and all of a sudden they are stuck with a huge housing payment that they 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 mortgage loan approval will not happen if borrowers cannot provide verification of rent.
- Majority of lenders require that borrowers get an automated approval per DU FINDINGS or LP FINDINGS via the Automated Underwriting System in order to proceed with mortgage process
- There are cases where the readings from DU FINDINGS require verification of rent
- Whatever DU FINDINGS state on approve/eligible DU FINDINGS needs to be met
- If DU FINDINGS requests verification of rent, then borrower must provide rental verification or else 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 and/or bank statements
Alternatives If Approve/Eligible DU FINDINGS Require Rental Verification
Borrowers who 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 automated approval, borrowers need to provide.
- If DU requests VOR, then need to provide VOR.
- Reason that DU is conditioning rental verification is due to the following:
- because credit profile may be weak
- such as having credit scores under 620
- high balance credit cards
- large amount of collections/charge off accounts
- high debt to income ratios, or other credit/income/asset issues
- Loan officer can see if he or she can manipulate DU such as the following:
- adding more assets
- 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 mortgage originator see if he or she can submit 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 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 process
Qualifying For Mortgage With Direct Lender With No Overlays
Home Buyers who need to qualify for mortgage with direct lender with no mortgage overlays can contact us at The Gustan Cho Team at 262-716-8151 or text us for faster response. Or email us at email@example.com.