Posted by BABS on May 20, 1999 at 22:04:34:
Brandi,
Your lender is correct, only that portion above FMR can be used as credit toward down payment. You could, however agree to pay up to 2,400 in closing costs. On your end, do not refinance you already have a good deal. There are mortgage brokers who can get this done as a refi, I would sit tight, you have a good deal, the further out your L/O goes the equity grows for you. Bruce
L/O Rent Credits - Lender to decide what is allowed? - Posted by Brandi_TX
Posted by Brandi_TX on May 20, 1999 at 11:25:51:
I have been talking to mortgage companies, trying to figure out how they can assist in pre-qualifying any Tenant/Buyers I get signed up on a L/O.
The information I am getting does not sound like anything I have learned here. (Go figure, Right?)
Anyway, here’s the problem:
When giving rent credits to my buyer, I understand that the total rent is usually over market rents, and that the credit is ideally minimal. According to the mortgage companies - the rent credits I negotiate with my buyer DO NOT MATTER unless they are over market rent. Example:
My option:
100k FMV
90k option price
700/mo rent (market rents (800)
350/mo credit
500 consideration
T/B option:
105k option price
900/mo rent
200/mo credit
3k consideration
From what the mortgage Companies are telling me, only 100/mo will be allowed to be credited to my T/B because their rent was only 100/mo over FMR. If this is the case, what is the point of offering rent credits at all. This, in my mind, gives less flexibility.
An even worse case would be if I wanted to excercise my option by getting a new loan. In that case, I would get NO rent credits because I am not paying over FMR. What a rip.
Having never seen this on the board, my guess is that I am missing something. Is it to be worded that the credit is to be applied to the purchase price instead of the downpayment? If so, the T/B would still have to come up with a down payment when if they excercise, wouldn’t they? Please folks, enlighten me… the bulb is growing dim.
Thanks,
Brandi_TX
*** Disclaimer *** I am from Texas, any info given by me pertains to what I know from Texas resources. All information should be verified with reputable people in your own area. (LMAO - just thought I would throw that in there! Have a great day!)
Re: L/O Rent Credits - Lender to decide what is allowed? - Posted by Bud Branstetter
Posted by Bud Branstetter on May 21, 1999 at 22:44:55:
Brandi,
FMR is just a guess. Your 100K house may rent for 700-1000 depending on the circumstances. The lender is not going to gripe if the FMR is within reason. It is also best to have the downpayment credit as a separate check so that you can show it is not just part of the rent. You can use the credit as an on time inducement. Or, don’t get it to me by the first-no rent credit.
Mortgage broker work all over the state usually. You can use the one I gave you in SA or find one in Austin or even Dallas.
Re: L/O Rent Credits - - Posted by JPiper
Posted by JPiper on May 20, 1999 at 13:17:14:
First, my credit is against the purchase price, NOT the downpayment. You can have any credit you desire, and when the tenant/buyer exercises his purchase price will be reduced accordingly?..the lender has nothing to do with this. My monthly credit builds equity, not a downpayment.
What the lender is telling you is that they will only recognize payments made above the market rent for the purposes of down payment. So if you were charging $100 above fair market rent, and crediting $200 against the purchase price, the lender would only recognize $100 for the purposes of down payment. But the purchase price is still going to be $200 lower. Hope that’s clear.
More importantly, there are lenders out there who will treat financing the exercise of a lease/option as a refinance. Therefore, this whole issue becomes a moot question. The lender will make their loan based on the appraisal rather than a new purchase?.thus no downpayment is required. What is required is enough equity to put the loan in place given the borrower’s credit, income and the then existing market value of the property.
JPiper
Re: L/O Rent Credits - Lender to decide what is allowed? - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on May 20, 1999 at 12:16:28:
Brandi,
I don’t see the problem here. If I read your post correctly, and I’ve been known to misread/misinterpret a few here and there :-), the lender isn’t saying that you can’t negotiate whatever rent credit you want to give. They just won’t use it to figure the creditworthiness of your tenant/buyer. Do I have that right?
If so, this sounds like a good deal for you. The way I see it, if your tenant/buyer will qualify for a loan based on only $100/month rent credit, and you’re offering $200/month rent credit, you’ll have a buyer that is certainly qualified for a loan amount GREATER than what they’ll actually have to obtain when they finally exercise their option.
If I have this wrong, and your mortgage broker really IS telling you when you can/can’t charge a rent credit, then I’d look at eliminating the rent credit and reducing the price by the amount of the rent credit. However, the scenario you describe sounds very strange to me. I don’t understand what rent credits have to do with a buyer’s creditworthiness. They either qualify for the loan amount they need, or they don’t. What am I missing?
Bill K. (AZ)
Re: L/O Rent Credits - - Posted by Brandi_TX
Posted by Brandi_TX on May 20, 1999 at 18:01:09:
Thanks Jim,
Of the lenders I have spoken to, they have all said NO to treating it as a refi. I will keep looking. (You big city folk have it made. LOL I guess this is why you suggested I move to San Antonio, hehehe)
Anyway, like I said, I will keep looking. Any suggestions on what “type” of lender will make this happen or is it the luck of the draw? (ie Would I have better luck with the lenders that specialize in low grade paper?)
Brandi_TX
Re: L/O Rent Credits - Lender to decide what is allowed? - Posted by Brandi_TX
Posted by Brandi_TX on May 20, 1999 at 12:35:59:
Bill-
I think the problem came from my first paragraph… I was talking to them about pre-qualifying people for me, and the subject of credits came up. Sorry for the cloudiness. They aren’t saying anything about the T/B’s ability to qualify…
Here is my understanding of what they are saying ( I too have been known to misinterpret):
If my T/B has been leasing from me for 2 years at 900/mo and I have agreed to 200/mo credit (2400), and the fair market rents are 800/mo… THEN then lender will only consider 1200 dollars to be what was over the FMR. They are saying that this is the amount they will consider as being applied toward the downpayment. Where did the other 1200 I agreed to credit to the downpayment go?
I always thought it was my choice to decide how much of the money I received in rent would be considered down payment.
Like I said… I know I am missing something here… i just can’t place it.
Thanks for your reply,
Brandi_TX
Re: L/O Rent Credits - - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on May 22, 1999 at 21:12:18:
Brandi,
I’m in Austin and I’ve not been able to find lenders who’ll treat L/O like a refinance. I have done a number of L/Os where I had credits to buyers. As Jim says above, you can offer any credits you want to your tenant, but only the amount over the fair market rent will be allowed as THEIR downpayment/closing costs. Everything else you’ll have either give them as price reduction and/or as closing costs that you’ll pay for them. My L/O agreement allows them to chose what they want to apply it towards: clos. costs I pay for them or price reduction.
One more problem with “lender allowed” credits toward downpayment. The appraiser comes out to determine the fair market rent at the time the option is exercised, which maybe a couple of years down the road. If rents in your area grow quite a bit over that period of time your buyer may not get any “allowed” credit at all. I suggest you explain that to buyer and have a rent increase built into your lease agreement. I had couple of cases where an appraiser erased my buyer’s credits almost entirely. I had to give them their money back through reduction of price and paying closing costs for them, and giving them a couple of months free rents before closing.
I See - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on May 20, 1999 at 12:46:47:
Brandi,
Is it possible to just reduce the price by that $1,200/yr that isn’t being credited by the mortgage broker? Or, does that now cause a problem with the LTV ratios?
This sure sounds odd to me. I hope others respond. I’d like to know how this all turns out.
Good luck!
Bill K. (AZ)