Whether you have a long credit history or not, the one thing lenders look to first is your housing history. This could mean mortgage or rent payments – the key factor is that you have consistency and responsibility in understanding the burden that housing payments can put on a person’s budget. Rent is no different than a mortgage, with the exception that you have no ownership in the property. When it comes to applying for a mortgage and gaining mortgage approval, your rent history can be just as important, if not more important than your other trade lines, so pay close attention to it in order to have the best chance at approval.
On-Time Payments Matter
On-time payments whether rent or mortgage could be a pivotal factor in your ability to get approved for a mortgage, whether you are a first-time homebuyer or not. When you do not have mortgage payments reporting on your credit report, the lender has to rely on the information provided by your landlord, which can help or hurt you, depending on your relationship. The most important factor is that you make your rent payments on time. This means on the day that it is due, not within the grace period, which for most landlords is 5 days.
How do you prove that on-time payment? You must pay with a check and the check must be cashed – this is the only way your lender can prove that you made your payments on time. Just writing the check is not enough – the lender needs to see the date the landlord cashed it. If the landlord sits on the check, you could have difficulty proving that you made your payment on time because anyone can write and date a check – but handing it over to be cashed and physically having it cashed without bouncing is what the lender needs to see. If the landlord does not consistently cash your rent payments when you hand them over to him, a Verification of Rent form can replace the need for canceled checks as long as it is completed and signed by the landlord.
Rent Shows your Financial Responsibility
When you apply for a mortgage, you are applying to add a rather large payment to your monthly obligations. The lender will want to compare this new payment to the rent you are used to paying now. This is why a paper trail is crucial. Canceled checks or bank statements provide the most concrete proof that you are capable of making similar payments each month. This matters even more than your debt ratio on paper. Sure, you could show that you have a 29 percent debt ratio on the front-end, meaning your principal, interest, taxes, and insurance, but if you are not used to writing checks for 29 percent of your gross monthly income every month, payment shock can be quite severe. When you are able to show that you are used to writing similar checks for rent, the lender has a compensating factor to consider when deciding whether or not to provide you with a mortgage approval.
Rent is an Alternative Trade Line
Many first-time homebuyers do not have any trade lines or do not have enough of them to create an adequate credit score. Rent can replace this need, but you need to have a decent history of it – typically 12 to 24 months. If you want to enhance your alternative credit, you can also throw in your utility payments, which helps to show that you can meet the requirements for monthly obligations. Paying these bills on time is just as crucial as paying your rent on time if you need a mortgage approval for two reasons:
- You need the trade lines if you are using alternative credit
- Many utility companies report to the credit bureaus if you are past due or end up in collections which can hurt your ability to get approved
Rent is a crucial component of your ability to gain a mortgage approval, especially if you are a first-time homebuyer. Showing that you can meet your monthly obligations and that they are a sizeable amount, which most rent payments are, can help you gain traction in becoming a first-time homebuyer with the variety of mortgage programs that are available to you today.