Many people who moved here with new jobs, rented a home. Some of them did this so that they could get to know the area, others did that because they came with little cash for a down payment – or credit boo-boos in their near past. No matter what the reason, if you are interested in buying the home you are renting, there are some things you should consider early in the process.
Below Fair Market Rent Payments
We recently had someone leave a comment that said they were renting a home that they wanted to buy, but they had not been paying rent. The buyer went on to say that in exchange for rent, they’d spent many hours making repairs to the home, cleaning out the previous owner’s things, and hauling off discarded items from the property. While these activities certainly have “value” to them – do they add up to the “Fair Market Rent” that the Appraiser sets for the home? That is a big factor for getting loan approval if you are buying the home you are renting.
FHA Home Loan Underwriters, in particular are required to look closely at rental payments for folks with middle credit scores below 620. If your middle credit scores are, say 660 – then you would not likely have the same issue as someone who has lower scores… although, depending on the FHA Mortgage Underwriter, the “no rent paid” issue could still be a big hairy fur ball.
The problem with the situation I outlined, where no actual rental payment had been paid, is that it could be considered a “Seller Contribution.” FHA limits the amount a Seller can give a buyer to 6% of the sales price. The below market (zero) rent paid, can be seen as an “inducement to purchase.” It could be a matter of how you document the work done, as to how the FHA Mortgage Underwriter reviews the File when you are buying the home you are renting.
Above Fair Market Rent Payments
In most Rent to Own situations, the Seller agrees to accept a HIGHER than market rental payment. So, if the rents in the area are generally $1200, you might pay the Seller $1600 a month. The additional $400 would then be a “forced” savings, and can be used towards your down payment.
When you are buying the home you are renting, this means you need to have a HIGH trust relationship with the Seller – who holding this extra money!
There are some “hitches” to this scenario if you are related to the Seller – because this is seen as not being a complete “arms length transaction” (Read it could be treated as a “Seller Contribution” issue).
Additionally, the FAIR MARKET RENT is determined by the Appraiser. So, if you and the Landlord feel that the Fair Market Rent in the are is $1200, and the Appraiser says – $1300, then $100 a month will essentially be lost in the contract when you are buying the home you are renting. The Underwriter will require a higher down payment.
Before you enter into ANY TYPE of Rent to Own agreement / or contract so that you are buying the home you are renting in NC, please contact us. Let us see if a) there’s an easier way to accomplish the end goal. Let’s take a snapshot of what your credit looks like – and set up a plan to fix it. Credit CAN be fixed – usually in just a few payments.
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.
If you are buying the home you are renting, and want more information about Contracts for Rent to Own in North Carolina – 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!