A common trend I am seeing is rent to own borrowers now ready to purchase the home they have been in contract on for a couple years. Lucky for them, values have skyrocketed, and they are walking into huge amounts of equity depending on when they started their rent to own contract. Here is an overview of how different loans like conventional, FHA, and VA treat rent to own borrowers.

Fannie Mae – 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 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.

Freddie Mac

The portion of rental payments paid by the borrower credited towards the Down Payment and/or Closing Costs under a documented rental/purchase agreement. The credit must not exceed the difference between the market rent and actual rent paid. The rental/purchase agreement must have an original term of at least 12 months and the rent must be based on a minimum of 12 months rental payments.

Provide the following:

• A copy of the rental/purchase agreement
• Evidence of rental payments
• Appraiser’s determination of the market rent for the subject property

FHA and VA

Where can I find policy governing rent credit?

Rent Credits refer to the amount of the rental payment that exceeds the appraiser’s estimate of fair market rent. The Mortgagee may use the cumulative amount of rental payments that exceeds the appraiser’s estimate of fair market rent towards the Borrower’s Minimum Required Investment (MRI). The Mortgagee must obtain:

• the rent with option to purchase agreement,
• the appraiser’s estimate of market rent, and
• evidence of receipt of payments.

A reduced rent is an inducement to purchase when the sales contract includes terms permitting the borrower to live in the property rent-free or has an agreement to occupy the property at a rental amount greater than 10 percent below the Appraiser’s estimate of fair market rent. When such an inducement exists, the amount of the inducement is the difference between the rent charged and the Appraiser’s estimate of fair market rent prorated over the period between execution of the sales contract and execution of the property sale.

Rent below fair market is not considered an inducement to purchase when:

• a builder fails to deliver a property at an agreed-upon time, and permits the Borrower to occupy an existing or other unit for less than market rent until construction is complete, or
• for Borrowers who meet the Identity-of- Interest exception for Family Members.

Always feel free to contact me directly with any questions!

by Andrew Augustyniak, Branch Manager/Loan Officer, People’s Mortgage Company