You may be wondering if your rental history will play a factor in your approval. How does where you’ve lived and how you’ve paid your rent affect your loan approval? Let’s dive in
Do Mortgage Lenders Look at Rental History?
Rental history is often overlooked in the mortgage approval process. Mortgage lenders and underwriters generally are looking into official sources when determining if a borrower can be approved for a loan, such as:
- Credit reports
- Pay stubs
- Bank statements
- W-2 documents
- Tax return forms
Since rental payments are often not reported to credit bureaus, they typically don’t come up in any of those documented sources, and therefore are not looked at or questioned. Although there are instances (such as during manual underwriting) where an underwriter will ask to see what’s called a verification of rent to confirm rental payment history.
What is a Verification of Rent?
A verification of rent, or VOR, is a form that is filled out by your landlord or rental management company, that shows your rental history. A verification of rent will include:
- Your correct physical address
- Your landlord or rental management company’s contact information
- How long you have been renting
- How much your rent is
- How often you are late on your rent payments
A verification of rent is generally on requested on files that are going through manual underwriting.
- A manual underwrite is done on loans that doe not pass through typically Fannie Mae or Freddie Mac guidelines, but that can still be approved with extra stipulations.
To obtain a verification of rent, your loan officer will send the VOR form to your landlord or other person in charge of your rental and ask that it be filled out and returned.
If you’re being asked to provide a verification of rent, it’s very likely that you’ll be asked to show that you have a couple of months of reserves (a couple months of your mortgage payment) saved in your bank account.
How does rent history affect your mortgage approval?
Does rental history affect your mortgage approval? This question is a little tricky, because there are a couple different scenarios that can decide whether it will affect your approval or not.
Easily put, your rental history does not always affect your mortgage approval (unless you have derogatory history that shows on your credit report)… but in certain situations it CAN affect your ability to obtain a loan.
Most rental payments are not reported to your credit, so lenders aren’t seeing it unless they implicitly ask to see it via a verification of rent. So in the case of good rental history, it doesn’t necessarily help (or hurt) your application – if you are an automated underwriting candidate. If you are a manual underwrite, then yes, good rental payment history will allow you to obtain a loan!
Now, derogatory rental history is a different ball game. If you are currently renting and are asked to obtain a verification of rent, but have a history of late payments, you may need to get back on track with paying your rent on time before buying a home.
Late or missed payments reflect to your lender that you do not consistently pay your housing payment on time, which really is their main concern.
Continually paying your rent on time each month so that you can have a full year with no late payments is key in obtaining a mortgage through a manual underwrite.
What is payment shock?
Payment shock is what occurs when you have a sudden increase in your monthly liabilities. This can happen if you, for example, are paying $1,200 per month for rent and your landlord would bump your payment up to $1,800 a month.
This also happens when you switch from a lower monthly rental payment to a higher monthly mortgage note.Think of it in a literal sense….if you are used to paying a certain amount every month, and suddenly that amount increases by a large amount, you would certainly be SHOCKED to see that payment and have to adjust your budget accordingly.
The potential for payment shock can be a huge red flag and sometimes can even stop you from having your mortgage application approved.
Payment shock is determined by a different threshold for each mortgage lender and can even be different on a file-by-file basis. These thresholds can include:
- Payment cannot increase by a set dollar amount
- Payment cannot increase by 50%, 100%, or 200% of your current housing payment
For example, if we’re working with a 50% threshold, your mortgage note can not increase by more than 50% of what your current payment is.
That means if you are currently paying $1,200 per month, an additional $600 per month mortgage payment ($1,800) would have you hitting that threshold.
- 100% = A $1,500 rental payment turning into a $3,000 mortgage payment, or just doubling in price
- 200% = if your housing payment more than doubles.
The reason why payment shock can be a red flag is because it creates the potential for defaulting on your mortgage. If you are not used to paying this increased amount each month, you may overextend your budget and not be able to pay your bills on time.
Generally, if you are keeping your monthly mortgage payment at or around the same of what you’re paying for rent, you will have no problems.
Even a small increase will not give you issue. If you feel like you may be subject to payment shock, ask your loan officer for a breakdown of what your payments could be and how it will increase or affect your approval!
Does an eviction affect your ability to buy a house?
Times get tough sometimes, and whether it’s for non-compliance with something stated in your lease or missing rental payments, sometimes evictions happen as a result of that.
If you’ve been evicted in the past, you may be worried about how that can affect your chances at buying a home.
Evictions are almost always reported to the 3 major credit bureaus, so if you’ve been evicted, your lender will more than likely know about it.
The good news is, that there are no agency guidelines through HUD, VA, USDA, Fannie Mae, or Freddie Mac that state that you can not qualify for a mortgage if you have been evicted before.
- However, timely housing payments (whether it be with a mortgage or rental payments) for the last 12 months are required when qualifying for a mortgage.
- If you have been evicted before the last 12 months, you still have a chance at qualifying for a mortgage, although it is better to not have any past eviction history.
Again, not all loan programs or files require a verification of rent, so your eviction history may not be brought up if you have settled your eviction and had it removed from your tri-bureau credit report.
How important is rental history when buying a house?
Not everybody rents before they buy a home! Some people choose to save money by living with friends or family members until they buy a home, which is great.
Some people who have lost their homes to natural disasters or had landlords who decided to sell the home from under them have to move back home as well.
There are many reasons why someone would need to stay with someone else rent-free instead of renting out a place to live. And lenders aren’t looking to discriminate against that!
So with that being said, the short answer is no – not having rental history does not automatically rule you out for a loan.
If your file is strong enough for an automatic underwrite, then lenders likely won’t even ask why you aren’t renting at the moment!
Manual Underwriting
If you are a manual underwrite and need a verification of rent, but aren’t renting at the moment, what you’ll need is a letter from the family member or friend that you are staying with. The letter will include:
- Your family member or friends’ contact information and physical address
- How long you have been staying with them
- That you are truly staying there rent free
- Why you are staying there
As long as you can provide a letter from the person that you are staying with, you should still be able to obtain a mortgage with this simple letter of explanation.
The Bottom Line:
Your past rental history isn’t a huge factor if a factor at all in your mortgage approval. There are some exceptions such as defaulting on rent or needing to verify your rent for a manual underwrite, but overally it’s not a large factor.
As with anything, the best way to know for sure what your mortgage options are is to speak with a loan expert who can guide you through the process.
Rental History FAQ’s
Do you need a rental history to buy a house?
No, you typically do not need to provide your rental history when purchasing a house. There are exceptions for manual underwriting but most will not.
Do underwriters call landlords for rent verification?
No, if you are required to provide rent verification there is a form that your landlord will need to complete, but the underwriter is not going to call your landlord.
Does paying rent help you get a mortgage?
Most of the time your rent does not report to you credit report and as such doesn’t help your mortgage approval. If you rental history does report to your credit bureau you can see a bump in your credit score ( as long as you pay on time) which can help.
Can I get an FHA Loan with an eviction?
There is nothing in the guidelines for FHA that says you cannot get a mortgage if you’ve been evicted. You will likely be asked to explain what happened with a letter of explanation, but it’s not a reason to automatically decline your loan.
Is rent included in your debt to income ratio?
Rent is not usually included in your debt-to-income ratio if you are buying a primary residence. The only exception to this would be if you aren’t buying a primary residence and would not be vacating your rent home.
What is proof of rent?
Proof of rent is also known as a verification of rent. This is a process that the lender uses to verify your rent history and payments for the last 12 months.
