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After years of renting, you're dreaming of buying a home. In the meantime, though, a major life event requires you to break your lease early. Breaking a lease is not ideal, and it may have you worried that it'll hurt your credit—and your chances of getting a mortgage. The good news is that a broken lease won't show up on a credit report or directly affect your credit scores. If you don't pay the money you owe the landlord, however, you could be hit with a collections account that damages your credit and makes it more difficult to buy a house in the future.
Read on to learn more about breaking a lease, the potential risk of doing so, and how to monitor and protect your credit throughout the process.
What Happens if You Break a Lease Early?
What happens when you break a lease early depends on the lease terms and state and local laws. In most cases, you will lose your security deposit, and you may have to pay other fees. If the landlord cannot find a replacement tenant, they may charge you rent for the months remaining on the lease.
If you don't pay the amount owed, the landlord may sue you. If you lose, you may wind up having to pay court costs as well as the money you owe; the judge might garnish your wages to do so.
Rather than spending the time and money on a lawsuit, the landlord may prefer to turn your debt over to a third-party debt collector, who will pursue you for the money you owe. If you still don't pay, the debt collector could potentially sue you.
Can Breaking a Lease Affect Your Ability to Apply for a Mortgage?
Breaking a lease won't show up on your credit report. However, if you don't pay your outstanding charges and your account is sold to a collection agency, that debt will appear on your credit report.
An account in collections has a negative impact on your credit that can make it harder to get favorable terms on a mortgage loan. Because collection accounts remain on your credit report for seven years, they can affect your credit far into the future. (Silver lining: As they age, collection accounts have less impact on your credit score.)
You may have been instructed by a real estate professional to pay off any collections before you close on a mortgage. Fannie Mae and Freddie Mac, the major government-backed mortgage companies, do not require borrowers to pay off collection accounts before single family home mortgage approval, and paying off accounts in collections may not improve your credit score either. Credit bureaus aren't required to remove paid accounts from your credit report. Newer credit scoring models, including FICO 9 and VantageScore® 3.0 and 4.0, ignore collections that have a zero balance, but older credit scoring models—including the ones typically used by mortgage lenders—do not.
Broken leases often appear in your tenant screening report, which some mortgage lenders review when considering your loan application. Even if they don't, the lender may ask your previous landlords about your payment history, and a broken lease may prevent them from giving you a glowing evaluation when a mortgage lender calls.
How to Break a Lease Without Ruining Your Credit
In many cases, the following are legally justifiable reasons to break a lease without it impacting your credit.
- The home is uninhabitable. Landlords must maintain property in livable condition. If your heating, power or plumbing doesn't work or the property is infested by vermin, you may be justified in breaking the lease.
- Your peace is breached. You have a right to reasonable peace and quiet in your home. If your landlord visits without notice or permission, your neighbors play loud music all night, or unnecessary remodeling goes on for months, your peace may be considered breached.
- You're entering active military duty. If you signed your lease and then entered military service, you can terminate the lease anytime. If you signed after joining the military, you can break the lease only if you've been ordered to deploy for 90 days or more or to permanently change your station.
- Your lease has a built-in termination clause. Some leases specify ways you can break the lease without consequences—for example, by paying a certain number of months' rent.
- You're in danger. If you're being harassed or stalked, are a victim of domestic violence, or have been sexually assaulted, you may be able to break your lease.
Tenant-landlord laws vary from state to state and even city to city. The terms of your lease also may include grounds in which you can terminate the lease early. Check the specific terms of your lease as well as state and local laws to see if you can legally terminate the lease.
Protect Your Credit When Breaking a Lease
If you do have to break a lease, reach out to your landlord as soon as possible, get the amount you owe in writing, and pay it before you move. Keep records of your payments in case of any questions later. Check your credit report and credit scores a few months after moving to make sure no collection accounts appear and verify that breaking the lease hasn't affected your credit. As you get your credit ready for a mortgage, set up free credit monitoring to keep tabs on your credit and get alerts of any problems that could cause a bump in the road.