Re: Option Money Blues… - Posted by JohnBoy
Posted by JohnBoy on February 12, 2002 at 14:54:27:
As far as applying option money towards the downpayment is concerned, that is something entirely up the buyer’s lender and has nothing to do with you. You won’t be the one giving them the loan. Their lender is!
You should never mention the word “down payment” in your contract when doing L/O’s.
If you agree to credit the option money at all, then only credit it towards the purchase price to avoid any potential problems later if the tenant/buyer doesn’t exercise the option.
If your option price is $100k and you got $5k as option money, then the tenant/buyer will have to come up with $95k to exercise the option. That doesn’t change the option price that was set originally. The option price is still $100k, but if you agreed to credit the option money towards the purchase price then the balance remaining due to cash out by exercising the option will be $95k!
When it’s time for the buyer to get financing then their lender will determine HOW their option money can be applied as far as they are concerned according to their own criteria. Some lenders will allow the option money to be used as all of or part of the buyer’s down payment. Some will not allow it and determine the purchase price to be the $95k instead of the $100k listed in the option agreement. It just depends on the lender being used.
This is why you should be working with a good mortgage broker that has plenty of lenders that can meet your needs to get your buyer’s funded. A good mortgage broker will know which lenders to place your buyers through so their option money can be credited as a down payment by the lender.
It has nothing to do with what you or your buyer may call it. It boils down to what the lender giving the loan will call it. So always apply any option money to be credited towards the purchase price only!