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Homebuyer Series Week 4: Best Tips for Paying Rent & Why

By Russell Smith

Mortgage and Lending with Blue Ridge Bank Mortgage NMLS # 78989

August 22, 2015 03:19 AM

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. Today, we are discussing 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. After reading comment if you found helpful.

best tips for paying rent & why

First of all, there are plenty of situations where a buyer does not have to prove a rent history because of the program type and overall strength of the borrower’s file, 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
It trains you to be used to what it takes to pay towards making house payments
You have a paper trail of payment in case there are disputes with the landlord
If you have a lower credit score or are borderline on getting approved, on-time rent will help a lot

Best Rent Tips For Future Homebuyers to Follow:

Having 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 “If you must pay rent in cash, Here are the BEST tips“
Always pay rent on time. On-time to a mortgage lender is no 30 day late payments but to a landlord or future landlord, past 5 days may be considered late. 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!
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 and if there is damage to the residence you could 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 so you can have the landlord agree in writing to the condition before you moved in so you are not charged for issues upon moving out.
Document special circumstances during the lease. If one month 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 so you can paper trail you still paid rent on-time in full. This is rare but what if the landlord says you can skip a month of rent? Transfer the same rent payment into your savings account because 1) you can show a lender that you still paid but you just paid yourself and 2) you just added to your savings account!
Pay your utilities on-time too. There are several reasons for this. 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 limited trade lines reporting on your credit report, a pay history on utilities can be used as alternative credit and could help in an 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 and when you get the deposit back upon moving out (refer to #4 above to ensure you get it back), stick it in your 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 not take the word of a family member for your pay history because family members may say anything to get you in a home
ALWAYS, ALWAYS, ALWAYS pay rent or a privately financed mortgage / lease to own contract by check if you are going to buy or refinance the home you are paying on. Think about it: If the seller (landlord) or the private mortgage holder has a chance to get the house sold, they could say you paid like clockwork just to get it sold and you may have never paid on time. So lenders almost always will not take a verification of rent form completed as proof rent history in these “non-arms length transactions”.

If you absolutely must pay rent in cash, Here are the BEST tips:

Don’t pay with cash on hand. By paying with cash laying around (not in a bank account), you can’t prove to a lender that you are the one who actually paid the rent
Withdraw the exact amount of your rent from your bank account every month. This will be a way to paper trail your payment coming out of your account and any lender should take this as proof of payment. But if your 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.
Get a signed receipt. Receipts WILL NOT work for a mortgage lender because anyone can write you 12 receipts to say you paid on time. So for this reason, they are not accepted by lenders. But having a receipt could be important in case you have a dispute with the landlord and you need to 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 (great way to pay as it can be scheduled to be paid on-time), and debit card (don’t pay by credit card because that is borrowing to pay your rent which doesn’t look good).
Save your bank statements (with all pages) so you can show your rent history paid by consistent withdrawals each month. If you are missing a statement, you can usually get a duplicate easily from your bank.
Don’t let the bank account you are using go negative. If you are choosing 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. So they will be scrutinized for issues such as NSF’s and this is a good reason to keep your bank account in good order.
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 which creates a payment history gap. So if you must pay 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 because the person verifying your rent is not a disinterested party to your purchase.

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 you can certainly see the positives of paying in other documentable ways. So if at all possible, pay your rent by check or other documentable format. It will provide you with an easy to obtain paper trail and it will get you used to paying like you would need to pay a mortgage.

If you live rent free with friends or family, be prepared to provide a signed letter from the person you live with stating that you live there “rent fee” and the reason (such as “family members”, “helping out until you can buy a house for a few months”, etc). Keep in mind that when you have no housing payment, an underwriter could see it being a negative if you go from $0 house payment to $1000 per month and especially if you have not been able to save any money in the meantime. That is known as “payment shock”.

Do keep in mind that there are plenty of buyers that are able to purchase a home without having to prove their rent history as many automated approvals for VA, USDA, FHA, and conventional loans do not require proof of housing payment history. This is especially true with higher credit scores and other compensating factors like good liquid assets and low debt ratios Why take a chance on hoping you don’t have to prove rent though? Therefore it is safe to follow these suggestions to be in position to buy.

We hope that you learned valuable information today that will save you money and help you get into the home of your dreams. Following these tips and steps up-front will make your purchase go much easier. If you have questions or want to qualify to purchase a new home, Contact one of our Team Move expert loan officers today so you are a happy homeowner in the near future!