Posted by JohnBoy on November 02, 1998 at 12:56:18:
A lot will depend on the lender. In most cases a lender will treat a l/o as a refinance instead of a purchase. A lot will depend on the loan programs available at the time the tenant exercises the option. If the lender will only allow an 80% LTV against the property the property will have to appraise for enough to cover the 20% difference.
Example: You l/o the house with an option to buy at $100k. The tenant put $5k down as option consideration. The tenant will need to come up with $95k to buy the house when they exercise the option. If the property appraises for $100k then the tenant would need a lender that offers up to 95% LTV on a refinance. If the tenant could only qualify for 90% LTV then they will be $5k short. They either would have to come up with another $5k, or you could carry the $5k as a 2nd mortgage. Some programs will allow 100% LTV and you wouldn’t have a problem as long as the property appraises for the balance owed. If the property was to increase in value and appraise for $115k in a year then the tenant would have $20k in equity. This would put a new loan at 83% LTV when they go to refinance.
The best thing to do if your concerned about the tenant being able to get financing and how much of a LTV they would be able to get is to find a good loan broker and have him look over the tenants credit and income to see what kind of program he could use to refinance them in a year. Sometimes you may find out the tenant could qualify for a loan now instead of waiting a year to qualify. Then you could sell the house now and cash out of the deal with all your profit up front.