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Living Big in The Big D

With Tara Deming
Friday, June 10, 2016 8:28 PM

Financial Fridays Addressing Housing Debt

By: Tara Deming

From student loans to credit card debt there are a myriad of dilemma’s people face when trying to buy or lease.  One of the most common barriers my colleagues come across is housing debt. In the booming DFW housing market landlords are collecting several applications then picking the best tenant to occupy the property.  Not only are they reviewing your credit history, job history, & background, they are definitely verifying rental history. Any issue with rental history/housing including evictions, broken leases and unpaid balances could potentially put you at a disadvantage from other applicants.  If you have any issues you will have to be prepared to be turned down a few times losing non-refundable application fees, pay a double security deposit to secure a lease and or settle for something you don’t really love.  Deal with any blemishes on your credit related to housing.  They aren’t going to magically disappear but addressing them and allowing them to age will increase your chances of getting approved for that apartment, condo or home.  Fortunately, creditors will often allow you to settle the debt for a percentage of what you owe and landlords may not look at it negatively if the debt is more than 3 years old.  Although I will try my very best to help you lease a home, REALTOR does not mean fairy God mother!  As much as we'd like too, we can’t make miracles happen by forcing a landlord to approve your lease application.  Pay off housing debt.  It will come back to bit you if you don't. 

Although its often a case-by-case situation, rental debt could also have an effect on your ability to buy a home.  Evictions, broken leases and/or unpaid balance place you in the high risk borrower category according 13-year mortgage lending veteran Demond Johnson.  High risk applicants can be turned down or required to pay a higher interest rate. A mortgage lender may also require you to pay off old evictions, broken leases and/or balances. In some situations, you can get approved for a mortgage loan without paying off old rental debt. One of the biggest factors that could play a role in what debt needs to be addressed is the type of financing the buyer is seeking. Ultimately, its best to speak with a lender before paying off old debt of any kind to determine if it’s actually necessary.  Unfortunately paying off rental debt doesn’t make it disappear from your credit report.  Often times the extra step of negotiating with the creditor to remove the debt from your credit report upon receipt of your payment is necessary.  This is time consuming and must be done prior to attempting to purchase a home.  I’ve had clients who had to back out of a sales contract because it took a company so long to send a letter saying the debt had been paid.  Without the letter the lender would not allow them to move forward with their home purchase.  Even still, just removing the debt from one’s credit report doesn’t fully absolve them.  Lenders often request a 12-month rental history, so if it’s within that timeframe the negative rental history can still come to light.

Not only can housing debt effect your ability to lease and purchase, late payments can also block your ability to close on a loan.  Demond Johnson says that your rental history is one of the main indicators of your ability to repay a mortgage loan and a late payment is the equivalent of making a late mortgage payment. He says that during the process of approving the loan the underwriter will request a verification of previous rental history. The loan processor then reaches out to previous landlords to see if you made timely monthly payments.  If you haven’t, this could prevent you from being able to close on the home of your dreams.  Unfortunately, rental verification may not take place until you are well into the process of buying a home.  So imagine you’ve looked at homes with your REALTOR for weeks or even months.  You found the perfect home, secured a contract and have your sight set on moving in, in a few weeks only to have your heart broken because you payed your rent late. Not a good feeling.  Always pay your rent on time but especially if you plan on buying. 

I'd like to take the time to give my disclaimer on credit. By no means am I a credit specialist, mortgage lender or financial advisor. What I am is someone who has made mistakes, sees mistakes my clients have made and would like someone to be able to benefit from them.  Maybe you already own a home and this information is not beneficial to you. There is someone, whether it is your child, friend, co-worker, or family member who needs guidance to take control of their financial future.  Encourage them to join me Friday's for more tips and information on improving your credit score and preparing to buy a home!