Rent Tips to Buy a First Home
In this series, we are providing tips to avoid the Most Common Roadblocks to Home Ownership. So far we have discussed how to solve limited or bad credit, no down payment, and not having a budget. Therefore, lets discuss overcoming Roadblock #4. Not being able to document rent or housing history to show, as a buyer, that you are able to handle a new mortgage payment. Ultimately in this article, we are going to provide you detailed rent tips.
Reasons to Document Rent History
First of all, there are plenty of situations where a buyer does not have to prove a rent history. Program type and overall strength of the borrower’s file are examples for being exempt from proving rent history. But there are very good reasons to have a documentable rent history:
- Paying rent monthly will prove you can handle a mortgage payment to a lender
- Making a rent payment is great training for a future mortgage payment
- You have a paper trail of payment in case there are disputes with the landlord
- On-time rent helps a lower credit score or borderline approvable file
Top 5 Rent Tips For Future Homebuyers to Follow:
- A good rent pay history is very important. Besides credit scores, prior rent or mortgage history is the best indicator that someone will pay a new mortgage on-time.
- Don’t pay cash for rent! There are several reasons not to do this that are talked about throughout this article. If you must pay in cash, read the following further down in this article. It is called “Rent tips for payment in cash”
- Always pay rent on time. On-time rent payments to a landlord is not going 5 days past the due date. But on-time to a mortgage lender is no 30 day late payments. So pay on-time to show you can make a housing payment. Make sure that the landlord cashes your check. Lenders don’t go by the date you write the check. Think about it- you could hold that check forever or it could bounce. Lenders go by the date that your check clears the bank so make sure you keep an eye on your bank account to verify that the check clears. If the check clears 30 days after the due date, lenders will count it that way. Plus paying late, will cost you a late fee to your landlord!
- Leave on good terms with the landlord. If you leave the home or apartment in a mess or damaged, your landlord doesn’t like you, or any other negatives, your landlord could cause you problems in the future. Your landlord could delay or even ignore requests to verify your rent pay history. If there is damage to the residence you could even get a judgment on your credit. Put yourself in your landlord’s shoes. How would you want tenants to treat your home?
- Do your homework before you rent! Read the lease agreement thoroughly and if you don’t understand it, have an attorney or rental expert explain it to you. Have a walkthrough with the landlord and take pictures of the condition, existing issues, and inventory. Then request the landlord agree in writing to the condition before you moved. This will prevent charges for pre-existing issues upon moving out.
Additional Rent Tips to Qualify
- Document special circumstances during the lease. For instance, the toilets overflow and the landlord says you can get it fixed and take it off the next month’s rent. Get that in writing and pay the repair by check. This will create a paper trail that rent was paid on-time and in full. This is rare, but what if the landlord says you can skip a month of rent? Then transfer the same rent payment into your savings account. There are two reasons.
- Show a lender that you paid yourself.
- Plus you just added to your savings account!
- Pay your utilities on-time too. In addition to the rent tips, there are several reasons to pay utilities too. First of all, if you are too late on a utility bill, they WILL report a collection on your credit which will hurt your scores a lot. In cases of a limited credit profile, a pay history on utilities can be used as alternative credit. So this could help in a mortgage approval. Read more about getting approved with limited credit & using alternative credit on FHA here or VA here
- Plan on using the security deposit as savings. If you have to pay a deposit on the lease, use that as a forced way of saving money. So when the deposit is refunded upon moving out (refer to #4 above to ensure you get it back), stick it in a savings account. Learn more savings tips that can save you up to $40,000 in a year
- ALWAYS, ALWAYS, ALWAYS pay rent to a family member by check. Lenders will obviously not take the word of a family member for your pay history. Normally a family member would not say rent was not paid on time
- ALWAYS, ALWAYS, ALWAYS pay rent or a privately financed mortgage or “lease to own contract” by check. Think about it. If the seller (landlord) or the private mortgage holder has a chance to get the house sold, they could say the tenant paid like clockwork just to get it sold and the tenant may have never paid on time. Finally, lenders will not allow a verification of rent on these “non-arms length transactions”. All of this is for the same reasons. The landlord or private mortgage holder has a financial interest to gain.
Rent Tips for Payment by Cash
If you absolutely must pay rent in cash, Here are the BEST cash rent tips:
- Don’t pay with cash on hand. By paying with cash laying around, there is no way to prove the payer.
- Withdraw the exact amount of your rent from your bank account every month. This will be a way to paper trail a rent payment coming out of an account. Any lender should take this as proof of payment. But, if the rent payment is $500 per month for instance, don’t pull $300 sometimes, $600 sometimes, etc. Be consistent and pull the exact amount of $500 out at the first of the month. If you need cash for something else at that time, make it a separate transaction.
- Signed receipts are helpful but not for a mortgage. Mortgage lenders do not allow receipts. Anyone can buy a receipt book and write out 12 on-time receipts. So for this reason, they are not accepted by lenders. But having a signed receipt could be important in case you have a dispute with the landlord. This would prove to the landlord or court that you paid the rent as agreed
- Use technology to make your rent payments. There are lots of new ways to pay rent conveniently that is as good as cash to a landlord such as Paypal, electronic funds transfer or bank draft. These options are a great way to pay as it can be scheduled to be paid on-time automatically. Even using a debit card could work. But do not pay by credit card because that is borrowing to pay your rent which doesn’t look good.
Even More Rent Tips for Cash Renters!
- Save your bank statements (with all pages) so you can show your rent history. Because it can prove the rent is paid by consistent withdrawals each month. If you are missing a statement, banks can provide duplicates.
- Don’t let the bank account being used for rent go negative. If one chooses to pay by cash and prove the systematic withdrawals through providing bank statements, that means the lender will not just see the last 2 months of statements but 12 months. These 12 statements will be scrutinized for issues such as NSF’s. So good reason to keep the bank account in good order at all times!
- Get a money order to pay the rent. Make sure that the money order is in your name, comes out of your bank account, and keep the money order receipts. In over 20 years, we can tell you that almost everyone that pays by money order is missing one or more. This creates a payment history gap. So for some reason rent must be paid by money order, put them in a fireproof safe every month.
- NEVER, NEVER, NEVER pay rent to a family member with cash! A lender will not take a verification of rent from a family member. The person verifying the rent history is not a disinterested party to transaction.
As you can tell, paying rent by cash can be tough way to prove your pay history to a mortgage lender. It is certainly not an impossible situation. But one can certainly see the positives of paying in other documentable ways. So if at all possible, pay rent by check or other documentable format. The benefits are immeasurable.
Rent-free or living with family
Living rent-free with family or friends requires a signed rent-free letter. First of all, the owner or tenant of the house must provide the rent-free letter. Second, it must state that borrower lives there “rent fee”. Finally, the rent free reason is explained. Examples include family members or friends helping out until the buyer can find a house. Keep in mind that when there is no housing payment, an underwriter could see it as a negative. Payment shock is a large increase in housing payments. Imagine going from $0 house payment to $1000 per month. No savings and living rent-free is even worse. One could see why lenders care about payment shock.
It is Possible to Buy Without Proving Rent History
The reason is that automated mortgage approvals do not always require proof of housing payment history. This is especially true with higher credit scores and other compensating factors. Compensating factors include good liquid assets and low debt ratios. So why hope that rent verification is not required? Therefore, it is safe to follow these rent tips and suggestions to be in position to buy a home.
We hope that this article has provided valuable rent tips that will saves money. By following these rent tips it will help purchase the home of your dreams. Additionally, this will make your purchase go much easier. Call us with your questions today. Our goal is to make you a happy homeowner in the near future!
Additional Homebuyer Tips
Now read the other articles in the Homebuyer Series – “I want to buy a home in a year!”:
- Establish Credit Worthy of Mortgage Approval for Any Type of Mortgage Loan
- Saving for a Down Payment and Emergency Savings
- Creating a Budget to Afford and Qualify for a Mortgage to Purchase
- Why Using A Good Realtor is So Important
- Knowing Your No to Low Down Payment Options
- The Last Steps to be Ready for Closing
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Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.