Is Rental Verification Necessary to Buy a House?
Your monthly housing expense is the most important bill that you pay. Mortgage lenders need your payment history to approve your loan application.
- If you have a mortgage, lenders look at your credit report or contact your current lender.
- If you’re renting, lenders verify your payment history with your landlord.
- Payment history is not the only factor. Lenders also consider how much your new mortgage payment would exceed your current rent. That factor is called “payment shock.”
Ideally, you have never been 30 days or more with your rent. And it’s better if your new mortgage payment doesn’t exceed your current rent by more than 50%.
Verification Of Rent
Most mortgage lenders require a prior rental history of at least 12 months. You can prove timely payment of rent with canceled checks or bank statements showing online payment of rent.
You cannot get mortgage approval with most mainstream programs if you have any late rent payments (30 days or more) during the last 12 months.
If you don’t have canceled checks to statements showing transfers, your lender can have you sign a Verification of Rent (VOR) form allowing it to verify your rental history with your landlord.
Here are the rules for rental verification for a conforming loan.
The following list provides examples of acceptable documentation to verify the rental payment:
- six months canceled checks or equivalent payment source
- six months bank statements reflecting a clear and consistent payment to an organization or individual
- direct verification of rent from a management company or individual landlord
- a copy of a current, fully executed lease agreement and two months canceled checks (or equivalent payment source) supporting the rental payment amount.
And here are the rules for FHA loans:
FHA treats rental references differently if they come from an individual than if they come from a property management company.
All references obtained from individuals should be backed up with the most recent 12 months of canceled checks. A rental reference from a management company with payment history for the most recent 12 months may be used in lieu of 12 months of canceled checks.
The VA requires a 24-month rental history if you don’t get approval from an automated underwriting system. Otherwise, provide what the AUS requires.
What if You Don’t Pay Rent?
What if you are living with your parents to save up money for the down payment on a home purchase? Or you’re living with a roommate and your name is not on the lease?
Most of the time, the answer depends on the loan program and your qualifications. That’s because many requests for rental ratings come from human underwriters. If you get approval from an AUS, you may not need anything more. A very strong borrower may not have to prove his or her rental history.
But what if your application goes to a human? You’ll have some explaining to do.
For instance, Fannie Mae states that borrowers currently living rent-free must provide a signed letter from a third party confirming rent-free status. If you currently pay rent to a roommate, you may need a signed letter stating what your arrangement is and proof of on-time payment to your roommate.
What Is Payment Shock?
Payment shock refers to the difference between your current rent (or mortgage payment) and the monthly cost of your new mortgage payment, including property taxes, homeowners insurance and extras, if applicable, like HOA dues or flood insurance.
Payment shock is the new payment divided by the old payment. If you pay $1,000 a month in rent, for example, and your new mortgage payment would be $1,500, the payment shock is $1,500/$1,000 or 1.5, which is 150%. Payment shock does not normally affect mortgage underwriting if you get an Approve/eligible decision from an AUS.
If your loan application requires a manual underwrite, your lender’s limits come into play.
Payment shock can be a positive factor as well. If your new payment won’t exceed your rent by much that’s “low payment shock” and can be a compensating factor in your favor. Compensating factors are positive items in your application that can offset less-positive items, like a high DTI.
Rental Verification and Automated Underwriting System (AUS)
Most mortgages go through an automated underwriting system (AUS).
The three most common decisions you’ll get from an AUS are:
- Refer with caution
If you get an AUS approval that does not contain a rental verification condition, you can bypass that requirement. A “refer” decision, however, means the system can’t render a decision based on available information. A human underwriter must take a look at the file and examine additional data.
Anything that triggers a manual underwrite requirement means you’ll need a rental verification.
- All mortgage loan applications two or fewer years after Chapter 13 bankruptcy discharge
- All VA and FHA Loans during Chapter 13 bankruptcy repayment plans
- Mortgage loan applications with credit disputes or identity theft victims
Homebuyers who need to qualify for a mortgage with rental verification, please contact us at Gustan Cho Associates at 262-716-8151. Alternatively, you can text us for a faster response. Or email us at [email protected]