With rates lower than ever before, even though they have gone up slightly, now is definitely the time to jump into the market if you are even considering it. Here is a well written post from George Souto on why Rent to Purchase may not be a good option for you.
Ginny Gorman wrote a blog on Tuesday titled "Lease Purchase in a Home | Recommended or Not?" I commented on her blog that I was not a fan of Lease to Purchase Agreements. In this blog I will attempt to show Why Lease Or Rent To Purchase Agreement Is Not A Good Option.
In its simplest form a Lease or Rent to Purchase Agreement is a contract between the Renter and Landlord, by which the Renter agrees to purchase a property at a later date, and in return the Landlord agrees to contribute money towards downpayment. The theory behind the Lease or Rent to Purchase Agreement is it provides a benefit to both Buyer and Seller. The reality however is a Lease or Rent to Purchase Agreement does very little to benefit the Seller, and is of no advantage for the Buyer. The reason why a Lease or Rent to Purchase Agreement is not an advantage to the Buyer is, because the money they thought would be available towards their purchase is not. Just because a Landlord agrees to contribute money received as part of the rental payment each month towards the downpayment, does not mean the Landlord will be allowed to do so.
The best way to explain this is by reviewing the Fannie Mae, and FHA Guidelines for Lease or Rent to Purchase Agreements. The guidelines for both Fannie Mae and FHA are similar but different, and Renters needs to be aware of these guidelines before entering into a Rent or Lease to Purchase Agreement so they do not find themselves in a very uncomfortable position latter on. Once a Buyer understands the Fannie Mae and FHA guidelines, they will most likely come to the realization it is not in their best interest to enter into such an agreement
Fannie Mae Guideline 303.13 Rent Credit For Option To Purchase:
States a rent credit for an option to purchase is an acceptable source of funds toward the minimal required Borrower downpayment. This amount can be for the full amount of the minimum required Borrower downpayment, the Borrower does not have to use any of their own funds in order to be able to use rental payments towards their minimum required downpayment. So far no problem, and appears to be in line with what would be expected. However, further reading of the guideline on how to calculate the amount of the Rent that is allowed by Fannie Mae toward the minimum required downpayment, paints a different picture. The guideline goes on to say that the:
- Credit for the downpayment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months.
- The market rent is determined by the Appraiser in the appraisal for the subject property.
- The lender must obtain the following documentation:
- A copy of the rental/purchase agreement showing a minimum original term of at least 12 months, clearly stating the monthly rental amount and specifying the term of the lease.
- Copies of the borrower's canceled checks or money order receipts for the last 12 months to confirm the rental payments.
- The Market rent that has been determined by the subject property appraisal.
FHA Guideline 302.5 Rent Credit:
Is similar to the Fannie Mae Guideline but more direct in my opinion. FHA Guideline 302.5 states the cumulative amount of rental payments that exceed the appraiser's estimate of fair market rent may be considered as an accumulation of the Borrower's cash investment.
Again this sounds pretty straight forward, but just like Fannie Mae, FHA has restrictions, and requires certain documentation. The Borrower must provide:
- A Rent With Option to Purchase Agreement, and
- The Appraiser's estimate of the fair market rent in the area for a comparable unit.
During Underwriting the Underwriter MUST treat the rent as an inducement to purchase with an appropriate reduction to the mortgage, if the Rent or Lease with Option To Purchase Agreement reveals the borrower:
- Has been living in the property rent-free, or
- The agreed rental payment is considerably below the fair market value.
As you can see the Landlord can not just contribute whatever he likes toward the downpayment, and can only contribute what the Renter has paid that is over and above the fair market rent. In other words the Landlord is only giving the Renter back the amount of money that he/she paid over what they were suppose to.
That does not seem to me like the Renter is getting any great deal here, and would be better off putting the excess amount in the bank where it will draw interest, and he/she has control over it instead of the Landlord.
Anyone considering doing a Rent or Lease with Option to Purchase needs to proceed with caution, and talk to a Loan Originator prior to entering into one. Realtors need to also proceed with caution or risk having to face a very angry Buyer when it comes time to purchase, and the money the Buyer expected to have towards downpayment is not their.
I realize this blog is lenghty, but it need to be so in order to clearly explain Why Lease Or Rent To Purchase Agreement Is Not A Good Option.
Info about the author:
George Souto NMLS# 65149 is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org
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