Sunday, June 28, 2009

How Much of the Rent Goes Toward Down Payment in a Lease Option Purchase?

The first answer to this question is easy: as much as you can negotiate with the seller/optioner.

The second answer depends upon the lender. Different underwriters may have different guidelines, but FHA loans are pretty well standardized in regard to this question. Because many optionees, lacking cash, will need a FHA loan, it is likely that the amount of rent allowable toward down payment (or other purchase expenses) must adhere to this rather stern rule:

Only the amount of rent OVER AND ABOVE CURRENT MARKET RENT can be credited toward the purchase.

Here's an example provided by mortgage broker Melisa Nelson-Hana:

Let's say that the current market rent is $1500 per month. Let's say that the seller/optioner needs $2000 to cover the mortgage. The contract could call for $2000 per month rent with $500 per month credited to the buyer/optionee toward purchase. In a typical 12 month option, the buyer/optionee would accumulate $6000 (12 months X $500 per month) toward the purchase--just about what the buyer needs for closing costs on a modest California entry-level home.