Gustan Cho The Mortgage Expert,
Publish On: March 4, 2024
This guide covers how paying rent timely will help get a mortgage approved. Homebuyers who have little to no credit tradelines and get a refer/eligible now have a chance to get an approve/eligible per an automated underwriting system will timely rent payments. Per Fannie Mae, Freddie Mac, HUD, USDA, and VA, verified rent is now factored in the automated underwriting system findings. Rental verification with low payment shock is a strong compensating factor. Payment shock is the difference between the rent payment and the new proposed housing payment on the new home purchase. In the following paragraphs, we will cover how paying rent timely will hellp get a mortgage approval where otherwise the borrower would not have.
Does Rental Payment History Help When Applying for a Mortgage?
In this blog, we are going to discuss if and how rental payment history can affect you when applying for a Mortgage. Many home buyers do not know the answer to this question, but knowing could be imperative when you decide to buy a home! First-time home buyers have no previous mortgage history, that is when paying your rent on time will help. Click here to apply for mortgage loans
What Classifies a First-Time Homebuyer?
Who qualifies to be a first-time home buyer? A First time home buyer is anyone who has not held an ownership interest in a property within the last 3 years. A first-time home buyer can be someone who is coming out of a divorce or who is “legally” separated that hasn’t had sole ownership in a primary residence within the last 3 years. However, it is ok for them to have joint ownership with their previous partner.
When depending on rental payment history to support your request for a mortgage, the mortgagee can use written documentation to support the file. Would need to include either the previous rental contract or the lease agreement.
In addition, the mortgagee will accept any of the following, a letter verifying a minimum of twelve consecutive months with good payment history from a landlord that is NOT family or a property management company, and either twelve months of consecutive bank statements or twelve consecutive months of cleared check receipts.
How Can Paying Rent Timely Will Help Get a Mortgage Approved
Paying rent on time can indeed be beneficial when applying for a mortgage, although it’s just one factor among many that lenders consider. Here’s how timely rent payments can potentially help in the mortgage approval process. While rent payments typically don’t appear on credit reports, some lenders may consider alternative credit data, including rental payment history, especially for first-time homebuyers or those with limited credit history. Consistently paying rent on time can demonstrate your ability to manage financial obligations responsibly. Click here to know how can pay rent with help of mortgage loans
Creditworthiness on How Paying Rent Timely Will Help Get a Mortgage Approved
Timely rent payments may indirectly reflect your creditworthiness and financial stability. Lenders want to see evidence that you’re capable of making regular, on-time payments, and a history of prompt rent payments can help establish this. Your ability to pay your rent on time may also indicate your capacity to handle mortgage payments. Lenders assess your debt-to-income ratio, which compares your monthly debt obligations to your gross monthly income. Timely rent payments can show that you’re capable of managing financial responsibilities within your income level.
Manual Underwriting
Some lenders offer manual underwriting processes where they consider various factors beyond traditional credit scores. In such cases, providing evidence of consistent rent payments can be particularly valuable, especially if you lack a substantial credit history or have a low credit score.
Positive Rental Verification
In some cases, lenders may request rental verification from your landlord or property management company to confirm your rental payment history. Providing evidence of timely rent payments can strengthen your mortgage application. However, it’s important to note that while paying rent on time can be advantageous, it’s not the sole determinant of mortgage approval. Lenders consider various factors, including credit score, employment history, income stability, debt obligations, and the amount of down payment you can make. Therefore, while timely rent payments can bolster your application, they’re just one piece of the puzzle.
How Can I Qualify and Pre-Approved For a Home Mortgage
Other requirements for first-time buyers would include minimum credit score guidelines from HUD, VA, USDA, Fannie Mae, and Freddie Mac and the rental premium for the previous twelve months would need to be higher than $300.00 per month. If your previous landlord was a family member it is required to still provide the lease or rental agreement along with twelve consecutive months’ bank statements showing the payment or canceled checks. Knowing how important rental payment history is, can be your key to the American Dream of Homeownership!
How Much House Can You Afford?
Now that we know how important it is, let’s talk about ways to ensure your payments are made in a timely manner. First, it is vital that you establish a budget. By budgeting your money and living within your means, you should be able to make your rent payments on time. Many people have a hard time and often live “paycheck to paycheck”. The best way to set up a budget is to figure out how much money you bring home each month.
How Much Can I Afford Versus How Much Can I Qualify?
Once that number is determined, in a perfect world, you would want to put ten percent of your weekly or biweekly income into a savings account. With the remaining ninety percent, you should prioritize where that money is spent. I think the obvious first choice should be your housing needs which according to the national average would be thirty percent. The other sixty percent of your income is personal preference on how it is spent. If I could suggest one thing, before you spend on frivolous things try to add extra money to your savings until you build up three months’ reserves for your rent. If you live within those guidelines, financial stress should not be a factor in your daily life. You are also on your way to owning a home!
