In a rent-to-own arrangement, the current owner (future seller) has the opportunity to earn a substantial monetary return on their home, and the tenant (future buyer) has the opportunity to begin on the road to homeownership.
What is a rent-to-own program?
It is a rental lease with an option-to-purchase clause. A tenant signs a long-term lease and is generally responsible for all repairs and maintenance. The tenant pays an agreed-upon monthly rental and an up-front dollar option amount to purchase the property at an agreed-upon time and price in the future. Please note that the option payment is not a down payment, but an initial payment made to have the right of first refusal to buy the property they are renting.
If the tenant decides to buy the property (they don’t have to; it’s an option), the initial option dollar amount is applied to the purchase price. Additionally, a portion of the rental amount can be applied to the down payment as well (more about that later). If the tenant does not buy the property, they lose their initial option deposit and the seller keeps the option amount. Any kind of properties will work well with a rent-to-own contract, but I would suggest that you concentrate on properties that avail themselves to a wide array of conventional financing options.
What are the advantages to a seller?
If you have to move you can structure a deal and remove some immediate pressure with possible upside. Sellers also have the option to make money from the rent paid, the lump sum option payment (if the tenant does not or cannot buy the home), the increased equity and appreciation in the property, the interest deduction, and the deduction of depreciation.
What are the advantages to the tenant buyer?
Allows you to rent a property you are interested in owning, allows you time to qualify for a conventional mortgage, repair your credit if applicable, buy below market if the contractual purchase price is lower than the value on the execution date, allocate a portion of the rental toward the down payment (subject to guidelines to follow), and decide to move quickly, once the lease is up, without a commitment to stay. In order to count the rental payments toward the down payment, the following underwriting guidelines must be met:
Rent Credit for Option to Purchase:
Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution. Borrowers are not required to make a minimum borrower contribution from their own funds in order for the rental payments to be credited toward the down payment.
Credit for the down payment 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.
Documentation Requirements:
The lender must obtain the following documentation:
• A copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months, clearly stating the monthly rental amount and specifying the terms of the lease.
• Copies of the borrower’s canceled checks or money order receipts for the last 12 months evidencing the rental payments.
• Market rent as determined by the subject property appraisal.
As in everything, you must evaluate and analyze the situation and make the best determination you can so that risk is minimized as much as possible so as to maximize the possibility of the upside.
By Carl E. Guzman, CPA
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a residential financing expert and a dealmaker with over 28 years’ experience. He currently has 168 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
