Verification of Rent on Manual Underwriting Mortgage Loans
Verification of Rent: Why You Need it When Getting Approved for a Mortgage in 2024
Buying your first home is one of the biggest steps you’ll ever take. And if you’re like most people, you’ve been renting until now.
Lenders look at many things when deciding whether to approve your mortgage application, but did you know one of the most important factors is how well you’ve been paying rent?
This process is called Verification of Rent (VOR), and it plays a huge role in the manual underwriting process for mortgages.
In this article, we’ll explain what the Verification of Rent is, why it matters, and how you can make sure your rental payments help you get approved for a mortgage. If you’re a renter considering purchasing a home or refinancing in 2024, this guide will show you what you need to know.
What Is Verification of Rent (VOR)?
Verification of Rent is when a mortgage lender confirms your rent payment history as part of your loan approval process. Lenders use VOR to see if you’ve been responsible for monthly rent payments. This is especially important if you’re applying for a loan through manual underwriting for an FHA or VA loan.
Compared to credit cards or car loans, rental payments don’t usually appear on your credit report, even if you’ve been paying on time for years. Your lender will probably need to confirm your rental history to ensure you can manage a new mortgage payment when applying for a mortgage. This is especially true if your credit score is less than perfect or you have many collection accounts.
Verification of rent is one of the most important items borrowers can provide a residential mortgage lender to qualify for home loans even though rental payment history does not report on the three big credit bureaus.
Talk To a Loan Officer Click Here
Why VOR Matters: It’s a Huge Factor in Loan Approval
When you’re applying for a mortgage, proof of on-time rent payments is often one of the most powerful pieces of evidence you can provide to show that you’re ready for the responsibility of a mortgage. Here’s why Verification of Rent is so important:
- Proves Your Financial Responsibility: A solid history of on-time rent payments shows lenders you’ve been responsible with a similar monthly payment, making you a safer bet for a mortgage.
- Shows You Can Handle the Payment Shock: If the difference between your rent and your new mortgage payment (called “payment shock”) is small, it demonstrates you’ll likely be able to afford your new home payments without struggling.
- Required for Manual Underwriting: Verification of Rent is often mandatory if you’re applying for a loan that requires manual underwriting, such as an FHA or VA loan.
What Is Payment Shock? Why Does It Matter?
The payment shock is the disparity between your present rent and your potential new mortgage payment. Lenders use this number to determine if you can comfortably afford your new home. For example, if you’re paying $1,000 monthly rent and your new mortgage payment will be $1,300, that’s a 30% payment shock.
Let’s break down a few scenarios:
- Low Payment Shock (0% to 20% increase): If your mortgage payment is close to what you’re currently paying in rent, this shows lenders you’re used to making similar payments, which is a positive factor.
- Moderate Payment Shock (20% to 50% increase): Lenders might be cautious but will still consider this if you have other strong factors, like a good credit score or savings.
- High Payment Shock (Over 50% increase): Lenders could see this as a red flag unless you show you have enough income or savings to make the larger payments.
The smaller your payment shock, the easier it is to get approved. If the increase is more than 50%, proving you can afford the new mortgage may be harder without running into financial issues.
How Verification of Rent Works for Manual Underwriting in 2024
Verification of Rent is required for manual underwriting, especially on FHA or VA loans. If you’ve been paying rent on time and have a stable rental history, that’s great news! Here’s how it works:
- Your lender will request proof of your rent payments for the past 12 months.
- This proof can come in several forms, but it needs to be documented.
- If you’ve been paying rent to a property management company, they’ll fill out a VOR form provided by your lender.
- If you’ve been renting from a private landlord, you must show 12 months of canceled checks or bank statements proving you’ve made timely payments.
It’s essential to provide the right documentation. Even if they’ve been on time, cash payments to your landlord won’t be proof of rent.
Apply For a Mortgage: Click Here
How to Qualify for a Mortgage with No Verification of Rent
What happens if you’ve been paying rent in cash and don’t have documentation to prove it? Unfortunately, you won’t be able to use Verification of Rent to approve your loan. But don’t worry—there are still options:
- Improve your credit score: Increasing your credit score before applying may help compensate for the absence of a confirmed rental history.
- Save for a larger down payment: Increasing the initial payment decreases the lender’s risk, potentially increasing the chance of loan approval.
- Work with a lender with no overlays: Some lenders don’t have extra requirements beyond what the FHA, VA, or other agencies require. These lenders might not need a VOR if your credit and financials are otherwise strong.
If you don’t have documentation for your rent payments, start making them with checks or bank transfers immediately. In the future, this will help you qualify for a mortgage more easily.
Tips for Renters: How to Ensure Your Rent Counts for VOR
If you’re currently renting and want to use your rental payments to help qualify for a mortgage, here are a few tips to make sure everything goes smoothly:
- Always Pay Rent with a Check or Bank Transfer: If you’re making cash payments, switch to a more verifiable method like checks or automatic bank transfers. These methods leave a clear paper trail for the lender.
- Rent from a Licensed Property Management Company: If possible, rent from a property management company. Lenders can easily verify rent payments with a simple VOR form.
- Keep Your Lease Agreement Handy: When you apply for a mortgage, the lender will want to see your lease agreement. Make sure it’s up to date and shows your exact monthly rent amount.
Irregular Payments: What to Do If Your Rent Payments Have Varied
Sometimes, life happens, and you may have paid less than your full rent for a month or two. Maybe you agreed with your landlord to do repairs in exchange for a lower rent payment. While this is common, lenders may consider irregular rent payments a red flag.
If this applies to you, be prepared to explain the situation to your lender. You’ll likely need to provide:
- A letter of explanation detailing why your payments varied.
- Receipts for any repairs you made if that’s the reason for the reduced payment.
- A letter from your landlord confirming the agreement.
Even if your payments are irregular, it’s still possible to be eligible for a mortgage if you can supply the appropriate paperwork and explanations.
What If You’re Renting from a Family Member?
Renting from a family member can make it harder to prove your rental payments. Lenders may be cautious about approving a mortgage when your rental situation involves close relatives. Here’s what you need to know:
- Proof of Payment Is Crucial: You must provide the same documentation (12 months of canceled checks or bank statements).
- Written Lease Agreement: Having a formal, signed lease agreement can help show the rental arrangement is legitimate.
- Explanation: Be prepared to explain the relationship and why it’s a standard rental arrangement.
Common Pitfalls That Can Derail Your Mortgage Application
Even if you’ve been paying rent on time, there are a few things that can cause problems when it comes to Verification of Rent:
- Paying Rent in Cash: Cash payments can’t be verified. If you’ve been paying in cash, switch to checks or bank transfers immediately.
- Missing Payments: If you’ve missed rent payments or paid late, this could seriously hurt your chances of getting approved.
- Not Having a Lease: Lenders want a clear lease agreement showing how much rent you’ve been paying. Make sure you have one ready.
How to Qualify for a Mortgage If You’ve Been Renting Without a Lease
Not every rental situation involves a formal lease, and that’s okay. If you’ve been renting without a lease, you can still qualify for a mortgage, but the process will be more complicated. Here’s what you can do:
- Provide Proof of Payment: If you’ve been making regular payments, even without a lease, providing 12 months of canceled checks or bank statements can be enough to prove your rental history.
- Get a Written Statement from Your Landlord: A letter from your landlord explaining the rental arrangement can help. Make sure it includes details about the rent amount and payment dates.
- Show Other Compensating Factors: If you can’t provide full documentation, having strong compensating factors like a high credit score, stable employment, or a large down payment can improve your chances.
What’s New for 2024: How Changing Guidelines Impact VOR
As of 2024, some lenders may consider adding rent reporting services to your credit report as a bonus. These services are gaining popularity and could be a game-changer in helping renters build their credit while still paying rent.
Also, given the rise of digital banking and rent payment platforms, lenders may be more flexible in verifying rent payments in 2024. Ask your lender if there are any new tools or services that could help make your rental payments count towards your mortgage approval.
How to Apply for a Mortgage with No Overlays
If you’re worried about meeting all the requirements for Verification of Rent, consider working with a lender who doesn’t add extra rules (called overlays) beyond what FHA, VA, or other loan programs require. These lenders are more likely to work with borrowers who have unique situations.
Conclusion: Verification of Rent Is Your Key to Homeownership in 2024
Verification of Rent is a powerful tool to help you qualify for a mortgage, especially if you’re applying for a loan with manual underwriting. Make sure to keep thorough records of your rent payments, transition to using checks or bank transfers for payments, and collaborate with a lender who comprehends your circumstances to improve your likelihood of approval.
If you’re ready to take the next step toward homeownership, contact a mortgage professional today. They can guide you through the Verification of Rent process and help you secure the home loan that fits your needs.
Ready to Get Pre-Approved?
Contact us today at 800-900-8569 or gcho@gustancho.com or apply now to get started on your homeownership journey with experts who specialize in no-overlay loans and manual underwriting!
FAQs About Verification of Rent on Manual Underwriting Mortgage Loans
- 1. What is Verification of Rent (VOR)? Verification of Rent is when a mortgage lender checks your rent payment history to ensure you’ve been paying on time. This helps the lender see if you can handle a new mortgage payment.
- 2. Why is Verification of Rent important for getting a mortgage? VOR shows the lender that you’ve been responsible for your rent, proving you’re ready to handle mortgage payments. It can also help you qualify for certain loans, like FHA or VA loans, especially if your credit score is low.
- 3. Can I still qualify for a mortgage without Verification of Rent? Yes, but it may be harder. If you can’t provide proof of your rent payments, you might need a higher credit score, a bigger down payment, or to work with a lender who has more flexible requirements.
- 4. How can I provide proof of rent payments? You may display a year’s worth of canceled checks or bank statements. If your rental is through a property management firm, they can complete a VOR form on your behalf.
- 5. Can cash rent payments count as Verification of Rent? No, cash payments don’t count. Lenders need to see proof, such as canceled checks or bank transfers. Cash payments can’t be verified.
- 6. What is “payment shock,” and why does it matter? Payment shock is the difference between what you’re paying for rent now and your new mortgage payment. Lenders look at this to see if you can handle the jump in monthly payments without struggling.
- 7. What if I’ve been renting from a family member? Renting from family can be a little tricky for VOR. You’ll need to provide proof of payment with canceled checks or bank statements and a written lease agreement to show the lender.
- 8. What if I’ve been making late rent payments? Late rent payments can hurt your chances of getting a mortgage. Lenders want to see consistent, on-time payments, so it’s important to stay current on your rent.
- 9. Can I get a mortgage if I’ve been paying rent without a lease? Yes, but it’s more complicated. You’ll need to provide proof of payments through bank statements or canceled checks and possibly get a letter from your landlord explaining the rental agreement.
- 10. Are there new changes for the Verification of Rent in 2024? In 2024, lenders may use rent reporting services to include rental payments in your credit report, helping build your credit. They might also be more flexible with digital payment records.
This blog about Verification of Rent was updated on September 6th, 2024.
