Posted by Mark (SDCA) on June 05, 2000 at 17:29:19:
Here is why I say applying it to the down is better. If you apply the option consideration to the down payment then you are reducing the amount of down payment money needed dollar for dollar. If you apply it to reducing the purchase price then you are only reducing the down payment by 1- the leverage factor. So even for an 80% loan, you would only reduce the down by 20%. For a lot of people I talk to, the down payment is a significant impediment.
Bank won’t consider option $ as down payment! - Posted by Paul Gould
Posted by Paul Gould on June 03, 2000 at 20:40:22:
Hi everyone,
I am trying to L/O my house. This guy is chomping at the bit. He has had inspectors out, he has agreed to 3% option money, ($5508), $1300/mt with a $250/mt rent credit and I have agreed that if he put another $250/mt on top of that I would match it with rent credit. He has talked to an attorney and a mortgage company. He has done everything right…But. The bank says that to give him credit for a down payment, I/we have to get a money market fund opened to put the money in. $5508 + $500/mt from him and $250/mt from me. Of course 1/2 of the $500 from him is taken from the $1300 rent. This will be a 2 yr contract. So after 2 yrs he would have $23,508 to put down. Also the bank told him to just take the $5508 off the selling price instead of using it as a down payment, which may not be a bad idea.
So, am I doing something wrong? Can’t I use this rent credit money as down payment without opening an account? I am using Carlton’s L/O form that clearly states this money is for down payment. He is coming over tomorrow to work out the numbers. Can anyone help??
Paul-
I am a lender, and I have an investor that will consider the down payment and rent credit towards the purchase price. After 12 months it will be handled as a refinance and the loan amount will depend upon their credit. With good enough credit, they could go up to 100%. BUT - be careful with the rent credit. Banks will only look at an amount ABOVE a reasonable rent as credit. For example, if rents in the area are going for $750, you could take in $1000/mo. and give back $250 as credit. They won’t accept a $750/mo. payment with a $250/month credit.
There are plenty of lending institutions out there that will accept rent credits.
I will bet that his attorney, knowing that option money is non refundable, is the one requesting the money be put into a bank account, not the lender. This may cause a judge to re-classify this as a contract sale rather than a Lease, if the buyer defaults…Who knows, but I bet the attorney just has to justify his fee to the buyer, and offered this up.
CountryWide says they won’t treat a L/O as a contract for deed, as the contract was not recorded, and I’m not about to start recording them !
I am beginning to understand that every Lender makes up their own rules to play by.
Just sold a house that the buyers had rented a few years on a l/o. They took the contract to a local mortgage company and applied for a refinance. The option money and rent credits were subtracted from the previously agreed to purchase price and they received a new mortgage for 100% of the remainder, which was about 80% of the appraised value at the time of the purchase/mortgager transaction. No seller’s settlement statement and no closing costs on my part, not even title insurance, since this was a refinance. Just had to sign the deed.
The option money and rent credits are NOT used as down payment money. They simply reduce the option price of the property “IF” the option is exercised.
The option consideration, which should be stated as “NON-REFUNDABLE OPTION CONSIDERATION” is for the seller taking the property off the market and tying it up for a pre-determined amount of time. As a result of the seller doing this, the property could increase in value before the option period expires costing the seller a loss in future appreciation. This also ties up the property where the seller could not sell it to another buyer while an option exists on the property unless the new buyer would except the terms of the option. Not to many buyers that I know of would want to offer more for a home and agree to the terms of an option price that may be lower than their offer. Anyway, shouldn’t a seller be entitled to get paid some money for doing this for a potential buyer and taking on the risk of the tenant paying on time and caring for the property while they occupy it?
The rent credit should NOT be listed as down payment money either. That credit is deducted from the purchase price “IF” and ONLY IF, the tenant exercises the option. Otherwise that credit is forfeited, period!
Now imagine if the tenant decided they no longer were interested in exercising their option for whatever reason and the option consideration and rent credits were shown as down payment money? The tenant may decide that since the money was shown as them paying this towards the down payment and that they no longer want to buy the property, they may claim they’re entitled to a refund of all the down payment amounts since they won’t be buying the house. Do see where this could become a problem later especially if the tenant got an attorney and went to court over this?? You don’t want to get involved with that kind of problem.
The way this should work with the lender is that “IF” and when the tenant should decide to exercise the option, the loan should be treated as a refinance vs. a new purchase. The option consideration and rent credits would be credited against the option price. This will allow the LTV (loan to value) the lender loans against the purchase price to be in a better position leaving some equity left in the property to better secure the lenders note.
Ask your lender and lawyer how they loan on someone wanting to refinance a property that was purchased on a “Contract for Deed”? A L/O should be treated pretty much the same way. If the buyers lender doesn’t understand this or they won’t agree to this, FIND ANOTHER LENDER! If the tenant can show rent payments on time for the two years and keep his credit clean and work on cleaning up any prior credit problems he may have, then getting refinanced later to exercise the option should not be a problem at all.
Re: Bank won’t consider option $ as down payment! - Posted by Mark (SDCA)
Posted by Mark (SDCA) on June 05, 2000 at 11:34:40:
Personally, I disagree with the option consideration part of this post. Option consideration is cash paid outside of escrow. Most lender will allow it to be used as down payment. And this is a much better deal for the T/B than using it to reduce the purchase price.
The rent credits are different although some lenders will allow that to go to the down payment as well- at least to the extent that the rent exceeds fair market.
I assume that you don’t want the option money to go to the down so that the T/B cannot claim interest in the property?
Yes, I know some lenders will allow the option consideration to be used at all or part of the down payment, including all or part of the rent credits as long as they exceed the fair market rent.
As far as my contract goes, this will not reflect any of this as being monies applied as down payment in any way. It reflects as what is. Option consideration for giving an option on the property at a predetermind price and rent credits applied towards the option price “IF” the tenant were to exercise. What the lender decides to consider it is their call.
I do not agree that having the tenant able to use this as the down payment is better. I feel it is much better to have it apply to reduce the purchase price instead. The reason I say this is because if the monies are used to reduce the price where the loan is being treated as a refi like a contract for deed is, qualifying will be easier and closing costs would be lower vs. structuring the loan as a purchase.
