Rent-to-own agreements and or sales that take place between a tenant and landlord have special FHA Home Loan Guidelines. Often times, when someone moves to our area with a short sale in their background, or previous forced foreclosure, had to move for a job and have credit issues in their past – they will rent a home here until their “waiting period” is over.
FHA Home Loan Guidelines: Rent to Own in North Carolina
If you are in this situation, and plan on buying a home under a rent to own scenario, first it’s important to know that there are different rules for different types of home loans in North Carolina – and we have different laws that are specific just to North Carolina, regarding Mortgage Loans.
All Government loans are popular, because of their low down payment requirements. VA home loans have no “formal” guidelines for a rent to own scenario, neither do USDA Home Loan underwriting guidelines – however, most North Carolina Underwriters follow the FHA Home Loan Guidelines for all Government home loan approvals in a lease to own scenario.
We see these Rent to Own Scenarios often times when one partner has good income, but not great credit – and the other person has good credit, but not very much income.
In most “Rent to Own” scenarios we’ve seen, the renter is paying a higher than normal rent, and that “extra” amount is suppose to go towards the down payment when you are ready to formally buy the home. The Landlord is essentially, acting like a savings account for you.
When you apply for a mortgage, we will order an appraisal from an approved FHA Home Loan Appraiser. The appraiser will determine the fair market rent for the property. Any money paid ABOVE the fair market rent will be used as a credit towards a future down payment. So, if the appraiser says the fair value rent for the home is $1000, and you pay $1500 a month – $500 for each month you paid that could be paid by the Seller as Down payment for you at closing!
What if the Appraiser doesn’t agree with the dollar amount you and the landlord negotiate as your “market rent” payment? That’s part of the problem.
The rent to own agreement must be approved by the lender. We recommend that if you are going into a “Rent to Own” scenario, you should call us BEFORE you start it.
If you are related to the owner there are additional considerations. The loan to value restriction is 85% if the parties are related, and it’s been a relatively short period of time you’ve been renting. FHA Home Loans allow a gift – so there’s really no benefit for doing this type of arrangement for a family member, simply have them give it to you as a gift?? However, if you go this route, you must have rented for more than 6 months for the additional money you paid in rent to count towards the down payment.
For NON related sales agreements – meaning you don’t have any relationship with the owner of the house except that you rent from them – FHA Home Loan guidelines state that you can make a minimum down payment of 3.5% and not have to have a minimum rental period.
In North Carolina, we are required to verify that you make enough income to qualify for the mortgage and make your mortgage payments. This is specific to North Carolina Home Loans – and in cases where folks are self employed, and write much of their income off, it can make it difficult to qualify. That’s not to say we can NOT help people who are self employed – just bring us all of your documentation, and we will figure out a way to make it work. We can often times use a non-owner occupied co-borrower in those cases.
If you’ve been renting for the last 3 years – you might qualify for the NCHFA First Time Home Buyer Program that offers a 3% down payment grant. They also have Mortgage Tax Credits available for those who meet the income restrictions and credit score requirements. In general, you will need a 640 middle credit score to qualify for the program.
If you are purchasing a home in NC, and want more information about FHA Home Loan Guidelines: Rent to Own in North Carolina contracts – please call Steve and Eleanor Thorne, 919-649-5058, or leave us a comment below – we try to answer all of them 🙂 Connect with us on Facebook or G+ we want to help you make your home ownership dreams come true!