You can usually qualify for a mortgage with a broken lease but the specific answer to your question depends on if and how a broken lease claim appears on your credit report. In many cases a broken lease is a non-issue when you apply for a mortgage although in certain situations you may need to address the issue.
In the past, leases typically did not appear on your credit report but over the past couple of years more landlords are working with the credit bureaus to have lease information, including payment history, added to your credit report. This is usually at the request of the tenant or borrower because on time lease payments help you establish your credit history. Despite this trend, however, the vast majority of leases do not show up on your credit report, especially if you rent your home from a private landlord or small property management company.
Your first step should be to determine if the broken lease is reported on your credit report. You can use a credit monitoring website or application to review your credit report for free once a year, so there is no cost to you. Plus, we want to emphasize that checking your credit report does not cause your credit score to go down, so there really is no downside.
If the broken lease does not appear on your credit report, then you should be in the clear, at least as it relates to your credit score. Mortgage lenders still want to see that you have made your rent payments on time for the past year, but changing where you live and who you make your monthly payments to does not create an issue.
Use our free get pre-approved form to get approved for your mortgage. Getting pre-approved enables you to identify and resolve potential credit issues before you apply for a mortgage.
If a broken lease claim does appear on your credit report this may present a challenge but it does not necessarily mean you cannot qualify for a mortgage. Before we dive into that, it is important to understand how and when a broken lease would show up on your credit report in the first place.
A broken lease only appears on your credit report if you owe your landlord money (or if your landlord thinks you owe money). If you broke your lease but paid any required early termination fee or arranged for a new tenant to take your place with the consent of the landlord, then nothing related to the lease should appear on your credit report. In short, there is a difference between breaking your lease amicably or having a dispute with your landlord.
If you broke your lease and did not pay the required penalty or owe past due rent, the landlord may file a claim to recover the money. In this case, a claim related to the broken lease may appear on your credit report.
Similar to a delinquent account for other types of loans or debts, if the landlord refers the claim to a collection agency the broken lease may appear as an account in collections on your credit report. If the landlord goes to court and wins a financial judgement against you, the broken lease may show up as a judgement on your credit report.
Both an account in collections and a judgement can cause your credit score to drop. The lower your credit score, the higher your mortgage rate and monthly payment. If your score is too low, you may be ineligible for certain mortgage programs although this is highly unlikely to occur solely because you broke your lease.
When you apply for a mortgage, there are several ways to address derogatory marks on your credit report due to a broken lease. In many cases it can be helpful to provide the lender a letter of explanation that outlines the reason you broke the lease including any extenuating circumstances such as a job loss or transfer or medical hardship.
You should also note in the letter if the landlord did not fulfill her or his obligation according to the lease agreement and the property was unsanitary or not safe to live in.
Additionally, some lenders may require that you pay off the lease claim or judgement before your mortgage application is approved. This is not always the case; however, depending on the circumstances that led you to break the lease and the amount of the claim.
Resolving the claim may also increase your credit score although it can take several months for your score to improve. Plus, the delinquent claim remains on your credit report for up to seven years after the issue is resolved.
In conclusion, it is certainly possible to qualify for a mortgage with a broken lease. In the majority cases, the broken lease does not appear on your credit report or affect your credit score so you can apply for the mortgage without hesitation.
If the broken lease shows up on your credit report, you should work with your lender to proactively address the issue. Depending on the amount of the broken lease claim and other factors, you may be required to provide a letter of explanation and in small number of cases you may be required to resolve the claim with your former landlord.
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders as qualification guidelines vary, especially if you broke your lease. Shopping lenders is also the best way to save money on your mortgage.