A rent to own is an ideal scenario for someone who currently doesn’t have enough money saved for a downpayment, but has already chosen the home they would like to purchase. This scenario appeals to sellers if they are willing to wait a year (or more) to have title transferred, but are comforted by having the agreement in place.
Important Considerations
1) Purchase price? what happens if the market drops and what happens if it goes up. Is the price “firm” under all circumstances?
2) What portion of rent is “rent” and what portion is “down payment”?
3) Are there any circumstances where the purchaser may back out of the deal. And what happens to the downpayment?
4) Does the downpayment accumulate interest?
5) Is the downpayment held in trust?
6) What happens if the home is damaged or uninhabitable?
7) What happens if either the buyer or seller is unable to complete their obligations?
How to set yourself up for a Mortgage when you Rent to Own
You may end up with a traditional “A” mortgage lender or a “B” lender, depending on your scenario. In addition to the normal requirements for lenders to debt service, verify income, etc.. there are conditions specific to the Rent to Own.
“A” Lender Requirements:
– maximum purchase price $1MM
– value based on purchase price agreed to in contract
– Contract signed and dated at the beginning of the rental period
– Rent and Downpayment must be from borrowers own resources.
– Rent to own agreement must include a letter of economic rent from an appraiser
– Registration of agreement on title
– Provisions for the prospective purchaser to be entitled to some refund of amounts set aside as downpayment in the event the sale does not proceed
“B” Lender Requirements:
– Contract with a rental terms of not less than 1 year from title transfer.
– Approval of contract.
– Verification of down payment and rents from own resources.
– Registered on title (preferred).
– Normal income and credit requirements for this type of lender (may include 6 months business banking statements, or T4s or T1’s or some combination.)
– mortgage amount may be based on Appraisal value at the time of title transfer and not the purchase price.
** please note that these lists may not include all requirement. Please contact me to be certain.
Recommendations:
1) Draft an agreement that accounts for all scenarios
2) Register the agreement on title
3) Make sure there is a paper trail for all monies.
4) Don’t be shy. Consult a lawyer and realtor to help you along the way.
Rent to Own’s are not ideal for any Mortgage Lender. Therefore, if this is the path you would like to take, please give me a call and we can work through the details together.
Rent to Own’s are not ideal for any Mortgage Lender. Therefore, if this is the path you would like to take, please give me a call and we can work through the details together.
Billie Aaltonen
BEcon/BComm
Senior Lending Advisor
Compass Mortgage Group
250.575.5478
billie@compassmortgagegroup.com