If you’re thinking about buying your first home or maybe you have owned a home before but it’s been a while since you did, you’re going to wonder about how to qualify in today’s environment. There are different qualifying guidelines based upon things such as your income and employment, current monthly debt, rent payment history, having enough cash available to close the transaction, and of course your credit history.
How to Qualify
Upon your initial application and authorization, a copy of your credit report along with a request for credit scores will be submitted. Getting this information after making the request occurs rather quickly. Within moments after making the request, your credit report along with credit scores will arrive. These reports are ordered electronically and returned almost instantaneously. The credit report will show current and active credit accounts such as a car payment and credit cards along with accounts that have since been paid off or closed.
Lending guidelines ask there to be at least three active tradelines appearing your report. Further, there needs to be at least a two-year history of each, including payment history. Each credit account will show the current balance, if any, as well as the highest balance on each account. Payment history is the most important factor with credit scores. Your payments won’t be listed as being on time, instead the report will show any late payments. Specifically, any payments made more than 30, 60 and 90 days past the due date. An isolated late payment here and there won’t affect credit scores very much but multiple late payments will.
Different Types of Credit
Different types of credit count more for your score compared to others. A department store card for instance won’t have as much impact as a mortgage. A mortgage account is the most important lenders review. Timely mortgage payments go far in securing a solid score. Okay, but if you’re a first time buyer, you’re not going to have a mortgage history, are you? What if you’ve been renting for the past couple of years?
Here’s where lenders need to look at your rental payments because your rent won’t be listed on the report. That is unless your landlord reports those payments directly to the three credit bureaus, which doesn’t happen very often. If you’re not sure if your rent shows up on your credit, you can ask your landlord if your payments are reported, or you can always get your free credit report once per year at annualcreditreport.com to see if your rent shows up. Most likely it won’t.
Instead, lenders will contact your landlord directly with a Verification of Rent, or VOR form to verify your rent payment history. Or, the lender can ask you to provide copies of the last 12 months of canceled rent checks. Don’t worry if the rent was paid on the 10th instead of when due on the 1st. What’s important is your rent payment history shows that no payments show up more than 30 days past due.
Rent Payment History and Your New Mortgage
Your current rental amount should be relatively in line with a potential new mortgage. There is no general guideline for most mortgage programs however there is a term called “payment shock” which compares current payments with future ones. Payment shock is typically reviewed only when loans are evaluated manually. If a current rent payment is $1,000 and the new mortgage is $1,500, an underwriter might take a closer look. If however the loan was submitted electronically through an automated underwriting system and an approval was issued, payment shock won’t be an issue. The only important factor with rent is timely payments.
If you’re getting ready to buy your first home, you should probably begin collecting copies of your checks or rent payment history for the last 12 months. Rent payment history is extremely important as it shows your ability to responsibly handle monthly housing expenses. If you have any questions about what needs to be provided upon application, we can run through that together over the phone.