While many young, potential homeowners stay at home to save money for their future mortgage payments, banks and lenders consistently decline applicants without 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 when you finally do move out.
Banks and lenders like to see your history whether it’s in the form of credit cards, auto loans, or a previous lease. If you fail to provide these things, banks and lenders will be hesitant to lend to you.
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 lenders’ point of view.
If you don’t have a current housing payment and suddenly take on a mortgage payment at several thousand dollars a month, banks and mortgage lenders are going to bet you may default on making your payment.
This theory is called payment shock, and is defined by an increase in your monthly housing payment beyond two-hundred percent. In other words, if your payment more than doubles, you’re 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
Clearly Borrower B will be favored for financing over Borrower A based on rental history alone. But if you insist upon living at home or rent-free, there is an exception. Drop 10% or more as your down payment and many banks and lenders won’t ask for rental history.