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There are two primary ways a rental history will affect your mortgage application. The first is a negative credit report resulting from missed rent or eviction. The second way is a positive reference you may provide on your mortgage. If you are a good tenant in the years leading up to your mortgage application, you will find many positive rewards.
Renting and Your Credit Score
Unfortunately, paying your rent every single month does not count toward your credit score. Paying your rent is like paying your utility bill; both will only show up on your credit if you neglect to do so. This seems lopsided to many borrowers, and it is one of the key criticisms of the credit score system. Your landlord will not report your successful payments to the bureaus. However, if you fail to pay, the landlord can have a collections agent contact you and begin knocking your credit score down. You should know this may not be legal. If you are ever contacted by a collections agency, ask the agent to verify his or her legal right to collect the debt. Instead of refusing calls from your landlord, respond immediately to prevent eviction. Eviction can be treated as severely as default on your credit score.
Mortgage Application Referrals
On your mortgage application, you will be asked for a history of your landlords for at least the past 5 years. Most applications will require you to confirm the payments you made toward rent during that period. If your rent payments were as high as your monthly payments would be on a mortgage, this serves as a good way for the lender to know you can afford the loan. The lender will verify this information with your previous landlord through a phone call or letter. They will ask the landlord if you made payments on time, were a good tenant and cared for the property well. In the end, the most important things for the mortgage company to verify is that your payments were what you have said they were and that you made each payment on time. Having a good relationship with your landlord will benefit you in the long run. Landlords who like their tenants are more likely to provide shining reviews in this process.
Asking for a Referral
You can improve your mortgage application by asking for a referral from your landlord prior to submitting the application for review. Inform your landlord you are trying to purchase a home, and ask if he or she is willing to provide an in-depth referral. The landlord may leave out key information when speaking with a bank, but a detailed letter will typically include the best information. You may even offer to write the letter on the landlord's behalf and have him or her simply sign the document. You will be surprised how many landlords are willing to do this for tenants they have a good relationship with. When the mortgage lender is comparing your application to another, having this document present will boost your credibility and likelihood to get the loan.
