Rental reference letters for home loan applications
A rental reference letter can be a crucial part of the home loan application process. Find out why.
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When you apply for a home loan, the lender will request a wide range of information from you. A lender needs to be sure that you’ll be able to meet your repayments and comfortably service the loan, so you’ll need to provide information about your income, your assets and your liabilities.
Lenders also want to see evidence of strong financial management on your part, such as your ability to make regular repayments towards a debt over a long period of time.
If you’re currently living in a rental property, the lender may request a rental reference letter from your property manager to provide proof that you won’t pose an unacceptable level of risk as a borrower.
Why do I need a rental reference letter?
Banks and other lenders don’t hand out money to anybody who walks through the door. In fact, most Australian banks have a conservative approach to lending money and will always look to minimise their risk. What this means for borrowers, and first homebuyers in particular, is that you need to jump through hoops in order to prove that you are capable of repaying the amount you wish to borrow. This is especially true if you want to borrow more than 90% of the property purchase price, so the lender will ask for details about your income, assets, liabilities, savings and rental history.
Most lenders have a policy that requires you to provide proof of savings over a period of three to six months, which commonly take the form of regular contributions to a savings account in your name. Commonly referred to as genuine savings, the bank balance you’ve built up needs to add up to at least 5% of the price of the property and also be able to cover the other costs of purchasing the property (stamp duty, conveyancing, loan application and establishment fees).
If you can’t provide proof of a regular savings history across a period of three or more months — maybe you were given the deposit amount as a gift from your parents, for example — many lenders will refuse your application unless you can provide other evidence of your saving ability.
One way you can prove your ability to save and make repayments is with a rental reference letter. This is a signed declaration from your property manager that details the amount of weekly rent you’ve paid for the past year and confirms that you’ve always made your rent payments on time.
A rental reference letter can also be used to improve the chances of your loan application being approved if you have a less-than-perfect credit history. Even if you can’t prove that your deposit came from regular savings, a rental reference letter can provide proof of your capacity to potentially make mortgage repayments as it shows that money is regularly being deducted from your bank account in order to pay rent.
What to include in a rental reference letter
If you’ve been asked by a lender to provide a rental reference letter, it’s quick and easy to find a template online that you can ask your rental property manager to fill out. Rental reference letters need to include:
- Your name
- The address of the property and how long you have been renting it
- The weekly rental amount
- A declaration from the property manager or real estate agent that you’ve always paid the right amount and paid your rent on time for at least the last 12 months
- The property manager or real estate agent’s signature and contact details
The lender will advise you if there is any other information or documentation that needs to be included.
Rental reference letter tips
- Better than a rental ledger. A rental reference letter is a much more useful tool for borrowers than a ledger, which is a statement that details the amount of rent you have paid and on which dates. As the ledger includes exact dates, if you’ve ever been just a day or two late with the rent for any reason, this could actually count against you when your application is being assessed. If your loan application is refused, this will go into your credit file and hinder your borrowing prospects in the future with other lenders.
- Just like a bank statement. In the eyes of some lenders, providing a rental reference letter is the same as providing a bank statement proving regular deposits into a savings account over a three-month period.
- Not from a landlord. In most cases, lenders will only accept rental reference letters from property managers or real estate agents, not from your landlord. This is because the landlord could be a friend or relative and is not a qualified professional. If you have a private rental arrangement, the lender may request six months’ worth of bank statements showing your regular rental payments.
- Lending policies are complicated. Lending policies differ between banks and are often quite complicated, so there are several reasons why a lender may not accept your rental reference letter. For example, the letter may not be accepted if you’ve moved in the past 12 months or if you’ve been living in share house accommodation.
- What to do if you can’t provide a rental reference letter. If you’re unable to supply a rental reference letter to a lender, there are other things you can do to strengthen your case. Putting together a larger deposit may prompt the lender to overlook the genuine savings requirement. Another option is to take out a guarantor home loan with the help of your parents. This involves offering your parents’ home as security on the loan and could allow you to borrow the full purchase price.
- Ask for help. If you need help finding the right home loan or applying for a mortgage, don’t hesitate to ask a mortgage broker for help. Brokers can offer advice tailored to your needs and help you through every step of the loan application process.
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