Rent to Own or Lease Option... How to structure correctly

Real Estate Agent with Keller Williams on the Water - Sarasota
Original content by David Shamansky NMLS#392126

I have to write this to ensure people know what they are doing when dealing with Rent to Own or Lease Options and trying to get permanent financing...

There is, just now, starting to emerge a semblance, albeit very minimal in footprint, for loans that are NOT federally funded. Federally funded loans consist of All... FHA, VA FNMA and FHLMC loans as well as USDA.

Outside of scarce Jumbo (in most areas of the country) and the, even more rare, Stated Income loan; the Feds comprise of well over 95% of ALL fundings on ALL loans today! If you need to borrow money to buy your home, chances are very high you will be getting a federally funded loan and they are black and white, so PLEASE pay attention on these Rent to Own and Lease Option ways to Purchase a home.

Where am I going with this?

I cannot believe how many agents have NO CLUE how these loans work!

So instead of me arguing over and over about it I am going to write out this detailed post and anytime it comes up simply send this blog post to the agents and not repeat myself for the next 5years +. I am also going to require ALL my Originators to send this out to ALL parties on the loan at the start so there are NO issues or misunderstandings on the trials and tribulations we are forced to deal with that come directly from HUD.

First this explanation is confined to FHA insured loans, which is about 99% of the permanent financing on these so if you are the exception and going conventional this will not apply.
***If you are an RTO or Lease Option Company KNOW these rules or you are causing MORE damage than good and will likely cause your buyer to not be able to perform at closing time!

  1. If you are NOT charging "Fair Market Rents" (this is determined by the going marketplace at time you ARE TRYING TO EXECUTE FUNDING NOT when you both signed the rental agreement, for similar homes in your area. To protect yourself and your buyer get a 1007 Rent schedule report completed by a professional Appraiser who is FHA licensed at the TIME YOU ENTER the contract as trying to go back 3yrs plus is impossible and with rising rents, even if it was fair at the time you signed the initial deal, if rents have jumped significantly then your buyer may very well be required to bring well more than the 3.5% min currently required by HUD. By failing to do this at that time and not today, you are almost guaranteed to be adding to the down payment requirement to your potential buyer (*if they live in an area of increasing rents) as HUD views this as an INDUCEMENT to purchase and will require the borrower bring ALL amount of "perceived value" or "inducement" to close or the loan WILL NOT close! Keep in mind they also do not care if you cannot prove it was fair at the time unless you can get an appraiser today to find rent records from years back.
  2. If you are overcharging and "applying" a portion of the excessive rent to the borrowers down payment the EXACT same rules apply and this MUST be documented with Proof by 1007 rent schedule add on to the appraisal at time of contract to ensure your buyer is going to get credit for the over-payment. If common rent is 1500/mo and you are charging them 2000/mo and both parties agree to apply 500/mo towards down payment and 2 years go by and you both expect to see the 12,000 get credited to the buyer for the down payment, and rent schedules have increased to 2000/mo now for the area, then your buyer will get $0 Credit if you do not have rent schedules FROM TIME OF CONTRACT to prove this!!!
  3. If you are trying to use "Sweat Equity" STOP right here that doesn't fly any more! Money Talks and the rest wont pass the test so save your time and breath it isn't applicable in today's market.

I just closed a borrower who had ZERO incentive from the seller to buy the home and DID pay what was most likely a FMR (fair market rent) when she entered into the contract 3 years ago but since those schedules DO NOT exist today and were never obtained at signing the deal, HUD requires us to use todays rent schedule and that shows well above what she was paying.

So what happened?

The buyer needed to bring in 24,000 to offset the "perceived Inducement" and the 3.5% min down payment, on top of that "perceived inducement" to meet the guidelines set forth by HUD and obtain approval to insure and close!

Knowledge is power and lack of it is the same KOD (Kiss of Death) against you. If you have made the decision to be in Real Estate for your living then you NEED TO KNOW this or NEVER do a RTO or Lease Option as you are wasting your time and the loan is almost guaranteed to not close unless you are working with a very savvy company who understands these inside out and can ensure you have a loan and avoid all issues prior to starting down the long and exhaustive process to get loan approval and closing these days.

Rent to Own and Lease Option can always sound like a nice alternative in the beginning but if not done properly, will almost always result in no permanent financing for the buyer and NO sale for the Seller!

Now you have been notified and now you need to print this and make this KNOWN to all in YOUR office!




Colorado 1st Time buyers, if you are ready to stop renting, get the many benefits from home ownership, or maybe your a current homeowner looking to move up or maybe looking into what it takes to become an investor in this incredible market, that WILL create millionaires, and you are looking for a strategy, answers and direction, please feel free to call or email me. My 22yrs in mortgage lending and 30+ years in finance gives me an in depth knowledge, critical to helping others and making their dreams go from dream to reality!

David Shamansky
"Positive reinforcer, promoter, success coach, entrepreneur, team builder, wealth builder, blessed individual, business leader and professional lender"

US Mortgages
6855 S Havana St Ste 520
Centennial CO 80112
Equal Housing Lender

*photos used may come from my personal pictures or


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