When Do Mortgage Lenders Require Verification of Rent

This guide covers when lenders require verification of rent during the mortgage process. Verification of rent is one of the most important factors required for manual underwriting. Lenders consider verifying rent (VOR) with payment shock lower than 5% as a strong compensating factor. Verification of rent with a low payment shock is viewed extremely favorably by mortgage underwriters. Verification of rent is only valid with check payments or bank wires.

Verification of rent, referred to as VOR, proves that a renter has made timely payments to their landlord for the past 12 months. Many renters only realize the importance of verification of rent once it is time to purchase a home and qualify for a mortgage.

Renters cannot pay the landlord with cash even though they get a paid receipt from the landlord. Cash payments cannot be used as proof, even with a signed receipt or letter from the landlord. For verification of rent to be valid, the renter needs to provide 12 months of canceled checks. Or bank statements that have been paid to the landlord if the landlord is a private landlord. In the following paragraphs, we will cover verification of rent.

Verification of Rent From Property Management Company

Suppose the renter is renting from a registered property management company. In that case, the canceled checks requirement is waived with a completed VOR Form completed and signed by the property management company manager. The lender will provide the VOR Form once the property management company is registered. The registered property management company manager completes and signs it. I think it’s enough. Proper forms need to be completed by both the landlord and the property management company, which the mortgage lender will provide for the VOR to be valid.

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Transitioning From Being a Renter to Becoming a Homeowner

Transitioning from renter to homeowner is a huge responsibility. Lenders are also very concerned about first-time home buyers who go from renting to owning a home. Underwriters will seriously look at payment shock. Lenders view first-time home buyers as high risk and take that there is a considerable risk of the first-time homeowner defaulting on their mortgage loan. This is why verification of rent is so extremely important. Underwriters place special emphasis on payment shock.

How Verification of Rent Works

We will take a case scenario of how the rent verification works. Let’s take a case scenario where a renter does not have rent verification. The mortgage underwriter will look at the borrower who will go from a zero-per-month payment history to a new housing payment amount. Let’s say the new housing payment will be $1,200 per month. However, if the renter had proof he was renting and could provide verification of rent, such as they were making $1,000 per month, the payment shock would be 20%.

For verification of rent to be valid, the renter must provide the lender with 12 months of canceled checks that you have been making housing payments for the past 12 months.

The home buyer now has a history of paying housing payments. Payment shock is 20% since going from $1,000 to $1,200. The new lender will not be concerned with the new $1,200 monthly housing payment as much as they will go from zero to $1,200. 20% payment shock is high. However, underwriters will view other aspects of borrowers’ credit and financial profiles in determining approval. Many renters need to realize how huge it is for them to be paying their monthly rent payments with a bank check. Many renters have proof of rent but need help using it because they pay it with cash.

What Is Manual Underwriting?

Homebuyers need to consult with a loan officer to qualify for a mortgage. The mortgage loan originator will take a mortgage loan application. Run a credit and submit a mortgage loan application and a credit report to the Automated Underwriting System. We need an approved/eligible automated approval. The automated approval will dictate whether or not the mortgage loan applicant needs to verify rent. If the automated approval states a verification of rent is required, the mortgage loan process can only proceed if the mortgage borrower can verify rent, VOR.

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Verification of Rent on Manual Underwriting on VA and FHA Loans

If the Automated Underwriting System renders a referred/eligible per automated findings on VA or FHA Loans, the Automated Underwriting System cannot issue an automated approval. However, the file can be downgraded to manual underwriting. VA and FHA loans allow manual underwriting on refer/eligible files:

• Refer/Eligible per AUS can proceed via manual underwriting
• Manual underwriting is when a mortgage underwriter is assigned to the mortgage loan application
• The file needs to be manually underwritten
• Compensating Factors are required on all manual underwrites
• One-month PITI reserves are required on manual underwriting
• No late payments in the past 12 months

Verification of Rent on Manual Underwriting

Verification of rent is required on manual underwriting. All manual underwriting requires verification of rent. Home Buyers in a current Chapter 13 Bankruptcy Repayment Plan and a recent Chapter 13 discharge without a two-year seasoning from the discharged date are all manual underwriting. VA and FHA loans are the two loan programs that allow manual underwriting.

Sometimes, a mortgage loan applicant gets approved/eligible per DU FINDINGS, but the mortgage underwriting downgrades it to a manual underwrite due to the risk factors.

Mortgage lenders consider late rental payments serious and can cause a mortgage loan denial. Homebuyers who are planning on qualifying for a residential mortgage in the near future should make sure to make monthly rental payments with a bank check. Be on time with monthly rental payments. In addition to timely rental payments, lenders expect to see borrowers making timely payments on all their credit obligations for the past 12 months.  If you have any questions about the content on this guide on verification of rent, please contact us at GCA Forums at 800-900-8569. Text us for a faster response.

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Frequently Asked Questions on When and Why Do Mortgage Lenders Ask For Verification of Rent

When buying a home, mortgage lenders often ask you to verify your rent payment history. This sounds quite absurd, but here is what it entails.

What is Verification of Rent?

Lenders usually verify rent to check whether a borrower is trustworthy with their acquired credit. To do this, they ask landlords or property management companies for documents proving a person’s rental history.

When is it Necessary to Verify the Rent?

1. First-Time Homebuyers: People who are new to buying property usually require verification of rent, as lenders require proof of credit that those individuals may not possess.
2. Low Credit Scores: If a borrower has a below-average credit score, lenders can request additional guarantees from the borrower and obtain the guarantees through rent checks.
3. Non-Traditional Credit Profiles: Borrowers who do not have credit scores, such as those who own credit cards or loans, can also be asked to verify rent payments.

Why Do Lenders Need Verification For Rent Payments?

• Assessing Payment History: Lenders require rented payments to understand how consistent borrowers are with making their mortgage payments.
• Risk Mitigation: Through verification, lenders alleviate risks by ensuring the borrower is financially sound and has a reliable payment pattern.
• Debt-to-income ratio and rent verification help calculate borrowers’ DTI ratio, which defines their eligibility for a loan.

What Documents are Needed for Rent Verification

• Landlords’ Statement: A landlord’s statement describing a tenant’s payment history, including the amount paid, late payments, and other details made by the landlord, signed by the landlord.
• Payment Records: Rental receipts, canceled cheques, and bank statements of the last 12 months who are rented

How Long Does the Verification Process Take?

Timing: Depending on the response from landlords and property management companies, it can take anywhere from a few days to two weeks.

What if I Am Not Able to Provide Verification for Rent

• Other Documentation: If you fail to verify, lenders will proceed with utility bills, letters from your landlord, bank statements, etc., to verify your rent.
• Look At Other Options: Strong rent verification is rarely a requirement for applicants with other strong financial indicators. Hence, it would also be wise to find alternate loan programs.

My Loan Application and What Should I Expect Now?

The lender may refuse to approve the application or impose stricter terms due to the verified income or lack thereof, such as no steady lease agreement, self-employment earnings, or free-room certificates.

To Counter Concerns From Lenders

Providing extensive proof can help reduce the risk the lenders present and increase the likelihood of this happening.

The mortgage application process requires rent verification, especially for people with no credit history or a low credit score. Knowing why lenders seek this verification can assist you in preparing your application and increase your chances of obtaining the required funds. If you have any specific issues, you can raise them with your lender or consult a mortgage advisor for assistance.