Does renting an apartment affect buying a house

Nowadays, qualifying for home ownership requires many applicants to jump through a few hoops before they can be approved for a mortgage. While it may be a hassle, this includes having their payment history put under a microscope.

Many of our clients ask us: “Does rental history matter when buying a home?” 

The short answer is: yes. While many people think that applying for a mortgage mostly involves presenting their income and their credit score, not everyone knows that your rental history can also play a huge role in helping lenders determine whether or not you meet the right qualifications for approval. If you are a first-time home buyer, your rental history is especially important in helping them sign off on your mortgage application.

Here are the three components of an applicant’s history that a lender will most closely examine to determine if they should be approved for a mortgage:

Eviction History

Have you ever been evicted from one of your living spaces? If so, you may want to carefully re-evaluate your rental history when applying for a mortgage. Lenders may ask this question to gauge whether or not you have been responsible with your finances in the past and to mitigate any potential risk.

If you’ve previously been evicted, this may not be the be all-end all of your mortgage application, however! The less recent an eviction is, the lighter the lender will usually investigate it. They may also want insight on the reasons behind the eviction, such as whether it happened due to an emergency, a health-related issue or from a lack of making regular payments.

Depending on the backstory, a past eviction may not necessarily break a deal. However, if your background shows that you have had more than one eviction, there is a high likelihood that this will hinder your ability to be approved for a mortgage until this information no longer shows in your credit history.

Credit Report

Lenders will look into your credit report to observe how responsible you have been with past payments. A large part of your credit score is made up of your payment history. If you’ve made late payments for bills in the past, this can lower your credit score. If you’ve previously been late with making rent payments, landlords often report this to credit bureaus. This means there is a strong chance that this will negatively affect your score as well.

The lower your credit score is, the less likely your bank will be to trust you with a loan. A decent credit score and a track record of making timely payments will increase your chances of being approved for a mortgage. Conversely, paying your rent and your bills on time will positively impact your credit score and heighten your chances of being approved for a mortgage in the future.

One solution we advise is to check your credit report regularly to ensure that there are no errors or discrepancies. Scheduling a regular credit report check annually can even help you offset any potential mistakes, as well as give you the chance to observe your spending habits if they need improvement.

Social Report

One of the emerging trends we’ve been seeing is lenders considering the relevance of a social media background check. In theory, this report is completed to assist in determining an applicant’s credit-worthiness by essentially running a check on a person’s on-line social footprint.

Payment History

Lenders will like to see that you have a history of meeting monthly deadlines when you make regular payments. This includes timely payments of your utility bills, credit bills and, of course, your past rental payments. A few late bill payments in your past is understandable — however, if you’ve made a routine of not paying your bills on time you may be seen as someone who can’t be taken seriously when it comes to financial responsibility. This might lead to a bank declining you for a mortgage.

If you are looking at ways to improve or build credit, paying your rent on time and honouring your lease obligation are two easy ways to achieve this goal.

Contact Us

If you have any further questions about how to how to prepare for a mortgage application and home ownership, contact Emerald Management and Realty Ltd. today! Our team is always happy to help. 

When you have a current mortgage loan, the amount of the monthly payment may become part of a potential landlord's total assessment of your financial health. If the mortgage is part of a larger, negative credit situation, it could also count against you during an apartment search. However, if it is a financial plus, it improves your chances of securing a rental.

Credit Checks

Many apartment owners run credit checks on potential tenants. Because a credit check shows your payment history with creditors, any accounts in collections, and public records such as judgments, a landlord can review your report and determine how faithful you are about paying your existing bills. When a mortgage loan appears on your credit report, the payment history on the installment agreement is of particular interest. If you consistently make payments on time, this reflects favorably on your rental possibilities. Likewise, late payments may indicate a money management or income problem.

Affordable Rent

When you applied for your mortgage, your debt-to-income ratio helped lenders determine how much money to lend you based on your ability repay the loan. In the rental industry, landlords also compare your income to your total debt payments to gauge your ability to meet a monthly lease payment. One-third of your monthly income is generally viewed as the maximum rent you should be paying. If your other debt payments, including a previously obtained mortgage, leave less than 33 percent of your earnings for rent, you may encounter difficulties securing a place.

Special Situations

If a unique situation, such as working through a separation or divorce, leads to your needing an apartment while your name remains on a mortgage, discuss the situation with your the landlord when you turn in your application. Many smaller property owners and managers maintain a degree of flexibility when it comes to tenant selection and may be able to offer you an apartment despite a few credit issues. Consider offering an extra month's rent with your security deposit to demonstrate your ability and willingness to pay.

Foreclosures

If you default on your mortgage and face foreclosure, it remains on your credit report for seven years. This can negatively impact your ability to rent an apartment, particularly if you suffered additional financial hardships at the same time. To maximize your chances of securing a rental, keep your other debts current and apply for units with rent charges that meet the one-third of your monthly income rule.

Paid-Off Homes

After you pay off a mortgage, it may remain as a positive mark under the installment loan section of your credit report for up to 10 years. If your future landlord mentions the existence of a mortgage when discussing your credit report, make sure that she notes your payment obligation ended with the account paid-in-full.

More Articles

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References

• MSN Real Estate: Seven Ways to Rent with Crummy Credit
• Charles Gate Realty: How Much Can I Afford for Rent Each Month
• Experian: "Paid, Closed/Never Late" Account Status Helps Your Credit Standing

Writer Bio

Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.