Importance Of Verification Of Rent And Payment Shock

Importance Of Verification Of Rent And Payment Shock On Manual Underwriting Mortgages

This Article Is About The Importance Of Verification Of Rent And Payment Shock

Importance Of Verification Of Rent And Payment Shock comes into play on borrowers with higher debt to income ratio on manual underwriting. Verification of rent is normally not required when borrowers get approved/eligible per the automated underwriting system (AUS). However, if a borrower has a higher debt to income ratio on a manual underwrite, verification of rent with low payment shock is considered compensating factor. Any payment shock that is lower than a $100 increase from the difference of the new mortgage versus the rental payments and/or a 5% or lower difference is considered compensating factors on manual underwrites. Mortgage underwriters will closely review the payment shock when underwriting a manual underwrite on a borrower with high debt to income ratio. In this article, we will discuss and cover the importance of low payment shock and the importance of rental verification.

The Importance Of Verification Of Rent And Payment Shock For Borrowers

What is the importance of verifying the rent and the shock of payments to borrowers

Most homebuyers 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.

What Is Considered Valid Verification Of Rent

Only documented monthly rental payments can be considered rental verification. Cash rental payments are not considered rental verification. This holds true even though the renter gets a cash-paid receipt from the landlord. Only canceled checks and/or bank statements for the past 12 months proving the rental payment has been transacted and paid on time each month are considered valid for verification of rent.

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

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 do 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

What is the importance of rent verification

For renters renting a home or apartment from a registered property management company, the lender can provide a VOR form to the property management company. The form needs to be completed by the property manager, signed, and dated. The verification of rent form is provided to the property manager by the loan officer. The completed signed VOR form can be used in lieu of canceled checks and/or 12 months bank statements for renters who live in a home that is managed by registered property management company.  12-months canceled checks and/or bank statements proving the rent payments have been drafted do not need to be provided to the lender. The VOR form from the property manager is sufficient and considered a valid rental verification.

Why Verification Of Rent Is Important

The 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 the 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.

Why VOR Is Important 

This eliminates risk and mortgage underwriters view it that borrowers can easily ease from paying rent to paying new mortgage payments. 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 in 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. However, at Gustan Cho Associates, we do not require a rental verification for borrowers who have lived rent-free with family.

Cases Where Verification Of Rent Is Mandatory

What are the cases where rent verification 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. 

The 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 the 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 the 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 canceled checks and/or bank statements. Gustan Cho Associates can often waive verification of rent for borrowers who are living rent-free with family. A living rent-free from a family member form will be provided to the landlord for them to complete, date, and sign that the borrower is a family member who has been living rent-free.

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.

The 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
  • a large amount of collections/charge off accounts
  • high debt to income ratios, or other credit/income/asset issues

The 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 for 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 canceled 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 a mortgage with a mortgage company licensed in multiple states with no mortgage overlays can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Not only do we have a national reputation of not having lender overlays on government and conventional loans but we offer dozens of non-QM and alternative financing mortgage loan programs for owner-occupant, second homes, and investment properties.

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