Sell Your Property Using Rent Credit
In this time of investing it sometimes can be a daunting task to get a property sold. Have you considered owner financing of some sort? You may be on the right track.
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.
It can be a great tool in making that sale. Not only will it help your exit strategy, it will be attractive to the buyer and help them qualify for the loan request made to the underwritinng institution(the bank).
However the loan will most likely be sold to the secondary market, Fannie Mae, Freddie Mac, etc...at the time of refinance, once the buyer gets their credit risk lowered.
In order for this to happen there are gudelines that have to be followed.
1. 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 will be needed.
2. Your buyer will also need copies of the canceled checks or money order receipts for the last 12 months evidencing the rental payments.
3. Market rent as determined by the subject property appraisal may be needed, because 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.
For example if market rents are $650 and your buyer is paying $750 then $100 will be allowed toward the downpayment.
While there may be some flexibility, I have seen sellers trying to credit the whole months rent toward the downpaymnet and let me tell you this will not happen. As a matter of fact as edgy as underwriters are these days it may get you a solid turn down.
Using this strategy may allow you to ask more for the property, and attract more buyers. It will assist them in getting that loan down the road, which will put cash in your pocket. Just help them understand they will need to keep good records in order to provide the needed documents to the lending institution.
To clarify, an Option isn''t owner-financing. Owner-financing would be a Land Contract or a Wrap. I teach in all 50 states, and ki have found that across the country, it varies widely as to what an underwriter will accept regarding rental credit. But all of them will accept rental credit towards lowering the purchase price. To ensure rental credit will be applied towards the down payment, the amount above fair market rent should be paid in a separate check with "Additional Option Consideration" written on the memo line of the check. Also, be aware that you can''t give rental credit in Texas, and that special rules about Lease Options also apply in the Lone Star State. Be careful not to give too much rental credit, because if the Tenant/Buyer doesn''t exercise the Option, and it winds up in court, you can be face repercussions for "unjust enrichment."
Thank you for your comment and insight.
Fannie Mae makes no requirement that a seperate check be made, however it is a good idea. In any case the lease contract must state how much of the rent will be applied. I do acknowledge there are different rules and laws for each State and the investor should have good legal counsel.
"Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution." is a direct quote from Fannie Mae guidelines.
You say [i["Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution." is a direct quote from Fannie Mae guidelines.[/i]
So what do I do? I google the [b]direct quote[/b]. What do I see? Nothing but your post.
So give us a reference to the fannie mae guidelines. I want to see this quote or something remotely similar.
Oops! Typo. "ki" should be "I." lol
2010 Selling Guide
Part B, Origination Through Closing
Subpart B3, Underwriting Borrowers
Chapter B3-4, Asset Assessment
Section B3-4.3, Verification of Non-Depository Assets
B3-4.3-13, Rent Credit for Option to Purchase (04/01/2009)
Introduction
This topic contains information on rent credit for option to purchase, including:
Rent Credit for Option to Purchase
Documentation Requirements
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.
Thanks dwill. For anyone looking for a link, as I was,****Must participate a while before posting URL's*** on page 387.
ITBInvestor hasn''t been around long enough to post URLs??? Can you please PM me the link, I''m assuming this is in a PDF doc, which is why a google search won''t pick up these key words.