A Verification of Rent, or VOR, is pretty much what it sounds like. A verification of rent is the process of verifying someone’s rental history and it’s a very important part of an applicant’s overall credit profile when a mortgage company evaluates a loan application, especially from a first-time buyer. First-time buyers, as well as any buyer quite frankly, ideally should have at least three active trade lines appearing on a credit report showing timely payments. Credit reports show the various credit accounts that are both open and being used as well as accounts that have been closed. Payment reporting is listed in timelines of 30, 60 and 90 days. If a payment is made more than 30 days past the due date, it will be listed along with the date the late payment was logged. For first time buyers, any late payments showing up will make it more difficult to qualify for a home loan.
There is also another type of credit called “alternate” credit which can be used with certain loan programs that review payment histories of consumer accounts such as utility bills, mobile phone service and cable TV. When alternate credit can be used to help qualify a borrower, it’s going to be a requirement the applicants provide a timely rental history. Without a clean rental history and using alternate credit reporting, qualifying will be difficult if not impossible. That’s where the VOR comes into play.
The VOR Form
There is a form lenders use to send out to landlords asking about an applicant’s rental history. The form is typically sent electronically via email but it may also be mailed to the landlord’s address. The form lists the landlord’s name and address along with the applicant’s full name and the property address rented. The VOR form asks how much the monthly rent was and if there were any payments made that were more than 30 days past the due date over the past year. Applicants typically sign a Borrower’s Authorization form that accompanies the VOR request which shows the landlord the applicant has given permission to ask for a rental history.
The landlord can be an individual who owns the property but it can also be a property management company which oversees an entire apartment complex. Either way, the VOR must be completed and returned to the lender.
Mortgage companies look at more than just a payment history when reviewing a verification of rental form. Mortgage companies also look for any “payment shock.” Payment shock is defined as any significant increase in monthly rent compared to the new mortgage payment which includes not just the principal and interest payment but also a monthly amount for property taxes and insurance.
Payment shock can be different depending on the loan program but most lenders accept such a change in monthly payment of anywhere from 120 to 200 percent of current monthly rent. That means if the applicant paid $1,000 in rent for the past 12 months, lenders want to see the new mortgage payment to be limited somewhere between $1,200 and $2,000 per month. Other factors such as loan-to-value and debt ratios can also affect higher or lower payment shock.
Many times with a limited credit history, mortgage companies go a bit beyond sending a verification of rent to the landlord. This is especially true when there is a limited credit history. Lenders can also ask for copies of canceled checks (front and back) showing the amount of rent paid, when the check was written and when it was deposited by the landlord. In today’s world of electronic banking however, reviewing 12 months of bank statements showing electronic payments to the landlord will also work.
Okay, but what if the due date for the rental payments are on the first of every month but the tenant doesn’t always pay on the first but does pay on another day such as the fifth or the tenth? Lenders can accept “late” payments such as this and typically do when payments made after the due date coincides with a paycheck deposit.
What if the tenant didn’t pay with a check or arranged for an electronic withdrawal but paid instead in cash? That’s going to be a bit difficult. There is no way for the mortgage company to independently verify when/if the cash payments were made. A lender might accept a written receipt from the landlord but that’s typically an exception to the rule. For those who are currently renting and are preparing to buy a home in the future, instead of paying cash for the monthly rent, it’s better to get a money order or a cashier’s check and keep a copy of the receipt as proof of payment.
Finally, if an applicant has not been paying rent for the past 12-24 months such as living with a friend or relative, that’s a major hurdle to overcome. Lenders need to see a history of timely rent payments from the applicants, and while living rent-free for a time certainly helps out with monthly cash flow, it won’t help when applying for a home loan.