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Rent To Own or How you can still buy a home with no money out of pocket!

***First Off, let me preface this by making something perfectly clear. No matter what program or product you are getting into to buy a home, I highly recommend making sure you have money (reserves) in the bank after your loan closes. Call it 'rainy day' money or whatever you want, you don't want to be financially strapped if something goes wrong. Ownership has its privileges and responsibilities.***

That being said, there are only two ways I know of to get into a home with no money out of your pocket these days. One is a VA loan, a loan for those who served in our military and who qualify. They are still offering 100% Financing with an allowable 6% seller assist. Those parameters can leave a lot of cash in your pocket.

The other is renting to own and I'd like to go over the basic parameters of how it works as of right now. It should also be noted that things have been changing rapidly, so please contact your Mortgage Professional to make sure they keep you abreast of changes as they occur. With any 'niche' product, time is of the essence because you never know how long it will last under the current guidelines.

While Mortgage Money has become tighter over the past year, the lease purchase program has become an increasingly popular method in which to finance the property the borrower is currently renting. The huge advantage to this program is we treat the transaction as a refinance utilizing the APPRAISED VALUE. Below are some of the program guidelines.

Max 85% Loan To Value Full doc (you must be able to prove enough income to be able to afford all current debts showing on your credit in addition to the new mortgage payment)
Looking for minimum 600 credit score (the middle of your 3 credit scores)
must produce 12 consecutive months cancelled rent checks (this is a documented housing history, Do Not pay by cash or money order.)
Lease purchase contract must be seasoned minimum of 12 months (it's best to record this at the local courthouse for documentation purposes)
Owner Occupied Only
Maximum loan size = $500k

This is a fantastic program that can enable a borrower to purchase their home without any money out of pocket. The only other thing I would note is to get an Home Inspection (which is different than an appraisal...which is required by the lender) done. Though you've lived in the property for at least a year and think it is in good condition, a home inspection will help lessen the chances of some surprise issue coming up after closing. If you have any questions, comments, concerns, critiques, or just want to complain....give me a call or shoot me an email!

Posted by Jason Sardi, Mortgage Banker on 02/28/2008 03:46 PM

Comments (23)

rent to own in pennsylvania, mortgage rates, mortgage brokers in pennsylvania, lehigh valley, va loans

Originally posted at: Real Estate Financing...: Rent To Own or How you can still buy a home with no money out of pocket!

This post has been included in Pennsylvania Information Lehigh County, PA Information

23 Comments on Rent To Own or How you can still buy a home with no money out of pocket!

FEB

2008

Jason,

We own a property and we gave the prospect an option contract to rent to own...if they didn't sign the option then there wouldn't be any money put aside each month from the rent as part of the down payment and it would remain a rental..plus their deposit is in limbo. In my opinion...they won't be purchasing it as they haven't signed the option and they have been late the last three months with the rent and just put a up a three day notice.....

Just curious Jason. If someone has 15% down payment, why are they doing a lease/purchase. Why don't htey just buy a home?

Neal - That's a shame, could of possibly been a heck of an opportunity for them.

Lenn - I'll give you a perfect example. The renter and landlord agree to a purchase price in a year of 160K. The house is worth a little more than that and after 12 months passes, it appraises at 200K. The borrower finances the 160K plus another 5k for closing costs, so they are borrowing 165K vs. a value of 200K. The LTV would be 83% because the lender uses the appraised value, there's equity already built into the transaction. It's treated the exact same as a refinance, they lend off the appraised value...not the sales price. Hope I'm making sense.

Jason, Great post. I know after reading all of your posts I would recomend someone to you. If only I know someone in your area..:-) You really give sound advice

Jason,

I loved you opening pragraph.

A long, long time ago in a galicy far, far away, I blog about not using lease options. I called it: A Consumers Guide to Buying And Selling With Lease-Options # 1

Thyen in another life I bloged about how to do it if you must: Successful Lease-Options

My advice: caveat emptor!

Respectfully,

Bill

Jason,

Good post. My only comment would be that with appreciation slowing significantly, what might be 7-15% in the years past might only be 3-10% in a current market depending on the area. That might impact the deal altogether. But still a good program worth noting.

Thanks Matt, I come from the school of Common Sense to a large extent.

Bill - I had to start with that, that's sound advice. And you and your Latin:-)

Zach - You are right on that. Depending upon the area, appreciation shouldn't be automatically assumed. Heck, it probably should never be automatically assumed!

Jason,

Great Post,

But does your market allow FHA financing. This product has become my favorite product. I understand this product is still having problems in certain markets where the values are too high.

Jason, I ran across the stats for the number of successful L/Ps. It was incredibly low. That said, it is a great option for some buyers. I do think that if the seller is collecting a part of the rent to credit for down payment, some lenders require that it be above the "market rent" (caution: vaporous definition).

I love this option and see many FBBO's turning to this when they can't sell the property outright. Any program that increases owner occupation has a positive effect on the surrounding property values.

I appreciate your answer to Lenn and I'm glad she thought to ask it. It's probably one of the most salient points in a market like ours where we are still enjoying double digit annual appreciation.

To Gary: I keep hearing this about FHA, but in many parts of the country you can't buy a chicken coop for under $300k. Lease-option is still a great alternative :)

Great information!!

FEB

2008

aaarrrghhh... I just wrote a comment and I lost it... lol Anyhoo.... now I don't know what to say, because it was good...

Jason... in any case... good job at bringing something up that isn't mentioned much. And something that most of my clients have steered away from in the past for a few reasons. Something that people aren't familiar with is that you don't always get back what was mentioned in the contract in terms of the rent paid. Usually the seller gives back a certain amount. But it comes down to the appraisers homework and the average rents in the area for that kind of property. Now, not sure how that works in the program that you mentioned, because this is a refinance. The 2nd issue, which has been mentioned, are the values in many areas. It's still hard to predict in a year. And this could scare sellers off. And just for the fact that sellers, in more cases than none, selling now...need the money now.

On another note, just curious.. is under a subprime type of program? Overall, good to bring up a type of program that isn't talked about often.

Ahh, Jason, all things come back to the forefront in thier own time...this was the main topic of years ago, this is the third time I have seen this cycle...great post, and thanks again for the heads up this morning

Gary - Yes, our market is a pretty good area for FHA.

Lane - I would love to see those stats, feel free to email them to me. That doesn't completely surprise me though, that's why these type of transactions need Professionals involved. I've saw way too many where it was just private parties and things got lost because of a lack of understanding about the entire process.

Jeff - I hate when that happens! This particular program is a Sub-prime one. To my knowledge, a lease/purchase isn't a conventional product.

Mike - Never a problem man.

I follow fine. But, what happens if the contract is for $160K and the appraisal in a year comes in at $130K?

Mmmmm.

Jason, We've had good success with FHA's with 3% seller downpayment plus 6% seller paid closing costs - great post - need to hthink of VA more myself :)

Lenn - Then that poses an issue. Markets that are in decline or even stagnant may not be able to utilize this particular product. My particular market isn't really in that boat for the most part, yet that's something to consider and pay close attention too when entering this type of transaction.

Jennifer - Good point in regards to the FHA. Lenn's point was excellent because this product probably wouldn't be such a good thing to consider in some markets across the nation.

Cyndee - VA is a really good option! I should mention that they will actually pay 4% closing costs and then another 3% on top of that...making it about 7%. The bottom line with VA, great way to get into a house with nothing out of your pocket. Then again, I hope everyone reads paragraph number 1 on this post before they start down that road....

Jason,

In a stagnate market the purchase price should be 15% below current value, in a falling market even lower.

There is always more than one way!

Bill

Very good point Bill.

Lane, I specialize in lease options and Jason there is a 3rd (Owner Financing). You are correct with the number of successful lease options, the main reason is most people who get in to them don't seek professional help and the owners are using it as a cash cow. 92% of my buyers who start a lease option finish the lease and buy the property! Why, because I keep up with them, help them fix their credit and make sure they can get a loan.

A lot of lease options are a scam. $25,000 option consideration, 1 year max and I have only met one person that has been able to fix their credit in one year if they needed to go the lease option route. The sellers are using people with bad credit to make money. They say "NO QUALIFYING", take the money and no darn good and well, in a year, they will get another $25,000 check!

You just have to educate yourself to the process and you could have a great way to get in to a home at a great price!

Thank you Jason for writing about this, most mortgage brokers won't touch this because they are afraid of losing clients. When in reality, if they send me someone who doesn't qualify, they get a buyer in two years when they do, instead of tossing the name in the garbage can like they have the last 5 years.

MAR

2008

Hi Jason ~ As you know...this is featured in the Mortgage PRO Week in Review. Thanks...

MAR

2008

Great information. This is an interesting concept....

MAR

2008

Another great post I missed and only by searching on the topic did I find it! Thanks Jason. I agree with Todd, you have to help people through the process. Once most people are educated, they will make it through.

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