The much publicized troubles of the home mortgage industry has prompted an abundance of inquiries regarding the possibility of rent-to-own or lease-to-own agreements between home sellers and buyers. In many of these cases, the economy of the past few years may be equally to blame by robbing individuals of the cash reserves that might otherwise have been used for down payments or even closing costs associated with a home purchase. Of course, we shouldn't forget the unemployment issue that is the third side of this current home buying problems triangle.
Just this week, I was discussing some of the particulars relating to rent-to-own with Lisa Roberts, a home mortgage specialist with Wells Fargo Mortgage. First, I should note that there are many different flavors of this type mortgage. Our discussions related to buyers wishing to rent-to-own for a relatively short period (not 30 years), while building credit to be used as a down payment, improving their credit scores or enhancing their employment position. Lisa pointed out that there are potentially significant requirements by lenders that should be known sooner than later, regarding the above rent-to-own scenario. A short snippet of these requirements can be found below:
A down payment derived from a “rent with option to buy” transaction may be
used only for the purchase of a primary residence and only if the original
lease contained the “option to buy” clause. The present rent must have been
in excess of market rents, thereby allowing the difference between market and
current rents to be applied toward the down payment.
The portion of the rental payment that exceeds the market rent can be applied
to the downpayment if there is a valid rental/purchase agreement in effect.
The file must contain a photocopy of the rental/purchase agreement to verify
the monthly rental and the specific terms of the lease. The original term of
the lease must have been at least 12 months.
Five Percent Minimum
The rent credit can be used for all or part of the down payment. The
purchaser does not have to make a 5 percent minimum cash down payment in
order for the rental payments to be credited towards the down payment.
Verification
The market rents must be developed by an appraiser or by local rental
publications. Copies of the canceled checks or money order receipts must be
obtained to document the rental payments for the last 12 months.
A down payment derived from a “rent with option to buy” transaction may be used only for the purchase of a primary residence and only if the original lease contained the “option to buy” clause. The present rent must have been in excess of market rents, thereby allowing the difference between market and current rents to be applied toward the down payment. The portion of the rental payment that exceeds the market rent can be applied to the down payment if there is a valid rental/purchase agreement in effect. The file must contain a photocopy of the rental/purchase agreement to verify the monthly rental and the specific terms of the lease. The original term ofthe lease must have been at least 12 months.
Five Percent Minimum
The rent credit can be used for all or part of the down payment. The purchaser does not have to make a 5 percent minimum cash down payment in order for the rental payments to be credited towards the down payment.
Verification
The market rents must be developed by an appraiser or by local rental publications. Copies of the canceled checks or money order receipts must be obtained to document the rental payments for the last 12 months.
While the above is but a tiny portion of the information needed to enter into one of these agreements, it does point out the need for more information. Whether buying or selling, my recommendation is to "measure twice and cut once" when entering into any agreement as important as purchasing a home. Feel free to contact me if you have further questions about this topic.