Accepting the move from renter to owner is a big step not only for you, but for your mortgage lender as well. First-time buyers pose a high risk of default. This stems from their lack of history repaying a large debt such as a mortgage, and covering additional costs of home ownership such as property taxes and insurance. Federal Housing Administration loans, widely used by first-time buyers, require that lenders verify your ability to make on-time housing payments.
Verification of Rent
FHA lenders require an institutional verification of rent form, or VOR, when you rent from a property management company. The property manager completes a VOR which certifies that you live at the residence, the time period you occupied the rental and your payment history over the past 12 months. The landlord may also provide comments about you as a tenant. You, nor your lender or real estate agent, may handle the VOR. The lender sends the form directly to your property manager for completion and it returns the VOR directly to the lender.
Your lender may request copies of cancelled checks for the past 12 months to establish your rental history. Lenders typically request the checks in lieu of a VOR when you rent from an independent landlord, rather than an institutional landlord or property management company. Because the lender can't solely rely on a third-party individual's word regarding your payment history, the FHA relies on cancelled checks to verify the amount and frequency of your rent payments.
No Rental History
You can qualify for an FHA loan without a rental history with automated underwriting approval from the Technology Open to Approved Lenders, also known as the TOTAL Scorecard. FHA's underwriting system may determine up front that your credit scores, income and assets serve as sufficient proof of your ability to repay the loan, allowing you to forgo rental history verification. Without TOTAL approval, the lender may deny the loan outright or manually underwrite your loan. A manual underwrite involves more intensive scrutiny of your credit and finances. It seeks to determine whether compensating factors exist which justify approving your loan despite a lack of rental history. Even when you live rent-free, the lender verifies and documents your housing history through information on your credit report.
Late rent payments, which are 30 days or more past due, can kill your FHA deal. You can explain late rent to the lender, and at its discretion, it may approve your loan despite a flawed rental history. You must provide the lender with documented proof that factors beyond your control – not disregard for your financial obligations or money mismanagement – caused the late payments. For example, a legal dispute between you and the landlord in which you were legally entitled to withhold rent, serious illness or disability or the death of a household wage earner, may qualify as extenuating circumstances which are unlikely to recur or hurt your ability to repay the loan.
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