First Time Buyers Wonder
We are first time home buyers who don't have a ton of money to put down on a Mortgage. We have an opportunity with some people who are selling their house and are willing to look at some rent-to-own options and then selling without a real estate broker.
This intrigues us because we can afford house payments but not the down payment. The question is, how much of our payment can we expect to go toward the house? And, how should we go about negotiating.
Do you have any information about renting or leasing to own a house? Any help and advice would be greatly appreciated.
In answer to the letter regarding the purchasing of a home via a lease/option or lease/purchase it is done all of the time. And the best thing that can be said is that whatever the seller and the buyer decide the down payment should be and agree on is what the buyer will have to pay. Also, the payment would be whatever the seller and the buyer agree on. If the seller and the buyer agree on a no down payment deal that is what it will be.
The dollar amount that goes toward the down payment is also decided by negotiating. Usually the law of the state requires that the amount of rent should be the market value of rents for the particular area the house is located in. In other words you will normally not be allowed to charge a lower amount of rent and expect the bank or other financial institution to accept any of the additional money as down payment.
For instance if the "going" rent in the area is $500.00 the down payment money must be above that amount. The most important thing to remember is that any amount that goes toward the down payment MUST be paid to the seller with a second check so the bank or other financing company has a paper trail to determine the amount to be applied as a down payment.
I have done a lot of lease/options and while I like them because they don't violate the "due on sale" clause on existing mortgages, I also like the contract for deed AKA land contract as well as other names because the deed is not transferred and this is nothing more that buying a property on an installment loan.
From a Mortgage Broker
As a mortgage broker, who knows the business, I felt I had a few suggestions that may help. First, the best way to get your home is not actually rent to own, but rather an actual Land Contract for the owner to sell you the land with a balloon in 12 months. This way, you can build a mortgage history. With a 12-month mortgage history, a few things happen. First, it will no longer be a purchase, but a refinance. Which is much easier to do with zero money, including closing costs.
Second, you can use the appraised valued rather than the purchase price. This is especially good when you know you have a growing area. Say your seller is willing to sell for $90,000. Well, it is highly likely you could obtain a slightly higher appraisal a year later. Usually, as a general rule, values do go up yearly.
First I would like say I am not an attorney. I am an Associate Broker in Salt Lake City Utah.
First there are plenty of mortgage programs that offer 100% financing, seller can pay the down payment or have the seller carry a second mortgage. A mortgage broker can help you with this. If your credit scores are high enough and your income is sufficient there is no reason to lease option or lease purchase.
There are two possibilities for leasing with a purchase-taking place in the future.
The first is called a Lease Option . In order to have a valid option, you must pay for it. Usually a minimum of 1% of the purchase price. You in turn lease the property for a said period of time, with an option to purchase within a specific time period. If you do not exercise your right to purchase you forfeit your option money. The advent of a lease option came from commercial transactions. When taking on a new business venture, it was more prudent to lose option money then to own a property with a mortgage after the business failed. So company would pay for an option to purchase say in two years, if the business were on track the company would exercise its option. A residential application is usually for a transferring person(s). Say a person being transferred from Chicago to San Diego, owned a home in Chicago. They would lease with an option to purchase. They would in turn sell there existing home, and then exercise their option to buy in San Diego. Again if they were unable to sell there current home in time, it would be better to lose there option money then to own two homes. Why would a seller want you to pay for an option (again if you don t pay for an option, there is no option)? If I were the seller I would not tie up my property for a period of time with no financial obligation to the buyer. Suppose in a year you decide you don t want to buy, I have removed my property from the market with no compensation.
The second is called a Lease Purchase. A lease purchase does not require option money. As a buyer you can (depending on how the contract is structured and the courts interpretation) walk from the deal without obligation. However these contracts can become very gray area, they are not specific enough for my taste. I like a contract to be very specific. Suppose you decide not to purchase, (depending on how the contract is structured and the courts interpretation) you can be liable for damages.
I cannot put enough emphasis on having representation. Depending on the state you are in, the disclosure laws and inspection requirements can be mind-boggling. Not to mention the different types of acquisition strategies, then there are types of title. Should we take possession as joint tenants, tenants by the entireties? The things that are in the purchasing of Real Property. The current value of the property. The type of mortgage (rates are expected to go up)The type of warranties from a deed. The physical condition of a property. The condition of the title.
Advice from a Landlord
As a part-time landlord who has sold a property or two as a "rent to own", here's what I've learned.
As far as negotiating, enter the deal as though you were buying outright. That means, get a qualified inspection on the house before you rent, negotiate a price that you will pay at the end of the rental period, and have it all put into the contract. (you can do this without a real estate broker being involved, but I'd at least get a real estate professional, or an attorney to look over the agreement for a nominal fee.)
Be sure you will qualify for a loan as of the date you will actually purchase the house. For example, if you plan to buy the property in 3 years for $200,000, with $20,000 down, be sure your income will allow you to qualify for a mortgage of $180,000 in three years. Remember that interest rates may go up! If you don't qualify, the landlord can keep all the money you've paid in as "rent" and you'll lose out.
Most landlords/sellers will charge you the base rent plus a predetermined monthly amount that they will apply to the purchase. On the property I rented, the normal rent was $1350 per month. I charged $1550 and put $200 per month into escrow for three years, thereby giving my renters $7,200 at closing towards the house purchase. You can negotiate any type of a deal that works for both you and the seller. But remember, if the deal falls through on your end, the landlord keeps all.
Rent to own can be enticing for potential homeowners who can afford monthly payments, but not the hefty down payment. They are a risk, however, because one never knows what the market will do. If the market "falls" you may be stuck buying a house that is not worth the amount you've agreed upon. Also, remember the 17% interest rates of the 1980s? You don't want to be stuck. If the homeowner is willing to do a rent to own, and doesn't need a large lump sum of money right away from the sale, he may also be interested in holding a mortgage for you. Ask him if he'll carry a mortgage for 5 years, with a balloon payment at the end. That will give you more time to survey the market, and you'll be building equity right away.
New Types of Loans
I just talked to a loan agent today about two programs they offer - Ameridream and Nehemiah. Both are perfect for people who can afford payments but don't have a down payment. You offer the full asking price, and the seller pays the down payment for you, essentially...if the house you are buying is $100K, most likely the seller would accept $95K. You offer the full $100K, the buyer contributes 3-3/4% (in the case of Ameridream) to Ameridream, of which 3% goes to the down payment and 3/4% goes to Ameridream.
The seller gets probably more than he was hoping for out of the house, and the buyer is able to afford a house without having to come up with a down payment on his own. All they have to pay is closing costs, approximately $1500. Nehemiah works essentially the same way. For the exact details, a loan officer whose bank offers these programs can help you. There are no income limits with either of these, although there may be a purchase limit (around here - Indiana -it's $144K for Ameridream, which buys a VERY nice starter home - I'm sure it would be adjusted higher if you were in an area with a higher expense).
Although this isn't rent to own, it's a solution to the problem of not having a down payment but having enough for the monthly payment.
Mortgage Banker's View
As a former Mortgage Banker (with over 16 years in the biz), I believe I may have the answer to your question: The amount of money that you can expect a lender to recognize as going towards your down payment is the amount of rent that you paid over and above the fair market rent for the property. In other words, if you pay $1,000 per month and the fair market rent is only $500, $500 per month would be applied towards the down payment as far as a lender were concerned. The way the fair market rent is established is by having an appraiser (licensed), do a comparable rent schedule and determine independently what the rent should be.
Also, you should make sure that you keep very detailed records regarding everything that you do: keep a copy of virtually every piece of paper that comes through your hands and every check which is cashed or deposit slip. Believe me, it may seem like a lot of work, but your Loan Officer will be able to make the process much more easy for you if you do your part.
Lastly, just because you don't intend to use a Real Estate Agent is no reason to be haphazard: have a Real Estate Attorney check over any contract which you intend to sign. The fee which they will charge should be just a fraction of the commission you would normally pay, and your interests would still be protected. Good Luck!
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