I spoke to a gentleman last week that lost twenty grand doing this. Trying to â€œwork aroundâ€ the federal system that is in place to protect you increases your risk a lot more than you realize. Do you know how a mortgage underwriter will interpret the contract when it comes time to pay off the seller? They will follow the mortgage underwriting guidelines in place at that time. Most loan officer could not tell you how they will view it today much less a year or two from now. What I know for sure is that underwriting guidelines are constantly changing. They will be different a year from now. A new update to DU, Fannieâ€™s underwriting software, will be released later this month, I hear some mortgage products are being terminated and others tightened again. How will it, or will it impact a lease option? Exactly, we donâ€™t know!
The reason I am being so specific is because potential home buyers with some type of issue that is keeping them from getting a mortgage believe rent to own is some type of magic pill, it isnâ€™t! It is usually a cyanide capsule. In the past couple of decades I may have financed one take out loan for one of these puppies. In the past three years dozens of people have told me how much money they lost on a rent to own deal. The reason the subject comes up is because they no longer have a down payment because they lost it on a rent to own so they are inquiring about down payment assistance.
I canâ€™t tell you not to do this, but I can advise you not to run in blindly without researching the next step or phase.
On a similar subject, most people that try something like this have been given a minimum timeline for fixing the problem by some well-meaning loan officer. Whatever timeline they gave you, triple it and your risk ratio drops as far as fixing the problem. This doesnâ€™t improve the probability of a rent to own working out as planned but it will be a more realistic eligibility target. If you can fix the problem soon that is great but boxing yourself in a corner on a minimum timeline is dangerous. Theory and the real world seldom jive when it comes to eligibility timelines.
So, if you still want to do this: 1. Research 2. Get expert legal advice 3. Dissect the underwriting guidelines for the type of mortgage you plan to use 4. Triple the timeline
I hope my 2 cents worth protects your hard earned money, good luck,
NMLS # 6395
Financing Kentucky One Home at a Time
I answer questions about financing real estate based on my decades of experience dealing with mortgage underwriters. This answer is my personal opinion, has not been reviewed or approved by the company I work for. I do not offer legal or tax advice, if you need answers from an attorney or CPA find one knowledgeable in your local market.