While it’s common for young, prospective homeowners to stay at home to save money for their future mortgage payments, banks and lenders consistently decline applicants without adequate rental history.
Though it makes perfect sense to live at home to save money on things such as rent, groceries, utilities and the like, it does little to prove you’ll be a sound borrower once you finally do move out.
Banks and lenders are very interested in your history, whether it’s in the form of credit cards, auto loans, or a previous lease. If you fail to provide these things, they’ll be hesitant to lend to you.
In short, if you want to qualify for a mortgage, it’s best to rent first so you have the ability to document that rent for at least a year.
Sure, you can ask daddy to co-sign for you, but if you don’t have that luxury, don’t plan on getting financing for that new home unless you can provide a VOR (Verification of Rent) for the previous 12 months.
And no, providing a VOR from a family member won’t fly in most cases, even if you insist that you pay your parents rent each month. It really doesn’t make sense from the lender’s point of view.
If you don’t have a current housing payment and suddenly take on a mortgage payment of several thousand dollars a month, banks and mortgage lenders are going to bet you may struggle making your payment each month.
This theory is known as payment shock, and is generally defined as an increase in your monthly housing payment beyond 200%. In other words, if your payment more than doubles, you’re automatically labeled a risky borrower.
Let’s look at an example:
Current housing payment living at home: $0
Proposed mortgage payment: $2,500
Current housing payment: $1,500
Proposed mortgage payment: $2,750
As you can see, Borrower B will be favored for mortgage financing over Borrower A based on rental history alone.
But if you insist upon living at home or rent-free prior to applying for a mortgage, there is often an exception. Come in with 10% or more as your down payment and many banks and lenders won’t ask for rental history, or at least require it.
They’ll still want to know what you were doing before you made an offer on a piece of property, they just won’t scrutinize it as much. And that can be a good thing!