"This is REALLY stupid that you need to contact my landlord".....that's what my borrower keeps telling me. He just doesn't understand the need for the underwriter to verify his monthly rental payment.
I'm working with some longtime clients on a refinance of an investment property they own. They currently live in California, and rent the home they reside in, however they do own a property up here in Oregon that they use an an investment. They've been great in providing me with their tax returns, wage statements, bank statements, etc.; they qualify for the refinance, based on all the information they have provided to me, however they are fighting me on the fact that we'll need a Verification of Rent (VOR) for their current primary residence.
My borrowers maintain that "what they are doing with their finances is none of their landlord's business". While that may sound reasonable to some, there is a very specific reason why the VOR is needed. Borrowers provided information on their application that their current housing expense is $1200/month. While they maintain great credit scores and I'm certain they pay their rent on time (they've been there for years and haven't been evicted), there's the issue of "how much" rent they are paying that needs to be verified, not just a matter of if they make their payments on time.
There's a very simple reason for this. Even after they refinance the investment property, they are STILL going to be making a monthly rent payment on the home they reside in. That monthly rent payment is all part of their monthly outgo with effects their debt to income ratios. Evidently, my clients pay their rent with cash. They peel off twelve one hundred dollar bills each month to Mr. Landlord and everyone is happy. It's "suspected" by my borrowers that Mr. Landlord doesn't report the incoming rent to the IRS. While what Mr. Landlord does with his money isn't any of my business and doesn't pertain directly to my borrowers loan, the AMOUNT my borrowers pay to him, does.
You may be asking yourself..."why does the lender need to know how much they pay?" The answer is really quite simple. Based on their $1200 monthly rental payment, my borrowers have a Debt to Income ratio (the relation of outgoing expenses as it relates to their incoming income) of 38%. What if the borrowers had indicated on their application that they paid $3000/month in rent? Well, with that escalated monthly outgo, obviously their debt to income ratios would increase, potentially making them ineligible for the expense of the new refinance.
My borrowers are just having a difficult time understanding that it's not just how credit worthy they are, but it's a matter of verifying that the monthly rental expense they provided, is indeed the ACTUAL amount they pay each month. Because they pay in cash, there are no canceled checks, and the landlord doesn't provide them with any receipts. It sounds to be a friendly relationship on their end but at the end of the day, the investor needs to make sure that a borrower's monthly obligations are true and correct for the purpose of qualifying and granting an accurate approval on a new transaction.