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Lydia

Questions....

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How do "sweat equity" and "rent credits" effect financing? Do they simply reduce the purchase price, so the loan the tenant/buyers qualify for is less? Or, does it "count" for something from a lender's viewpoint. Or, does only money paid as "down-payment installments" help the buyer?

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Good question, Lydia. But one without a definitive answer. I say that because it comes down to the rules of the lender in question. One lender may not accept rent credits as part of a down payment, while another may.

Generally, I have found that option consideration is acceptable as part of the down payment when a t/b exercises their option and goes to finance the property. It's a cash payment with a paper trail to verify it, and most lenders are fine with that.

On the other hand, most lenders will not accept rent credits as part of the down payment, because they are not a cash transaction or payment. As such, the t/b will receive the dollar value of the rent credits as a credit toward the agreed to purchase price. The contracts we use reflect this.

Sweat equity is something different entirely. This is increasing the value of the property through repairs and rehab. A property bought in as-is condition for $100K may increase in value to $140K with some cosmetic clean up and fixes. Now, when going to finance that property, it is usually easier to do so because of that increased value. A lender looking at the application feels more secure because the property value has increased and their position is better protected.

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Michael,

 

I'm glad this question was asked because I assumed I knew how this would work, but never really verified it.

 

Generally, I have found that option consideration is acceptable as part of the down payment when a t/b exercises their option and goes to finance the property. It's a cash payment with a paper trail to verify it, and most lenders are fine with that.

 

I have a PA with my T/B that states the full price they have paid. When we signed papers months back I had them sign three docs; a) Purchase Agreement, :lol: Option Agreement, and c) Lease. Now the T/B has started the financing process. They are asking for financing for the balance of what they owe. For example, agree price 150K - 5K option payment = 145K financed. How is this reflected in the closing papers? Does it simply show that I was given a 5K down payment?

 

most lenders will not accept rent credits as part of the down payment, because they are not a cash transaction or payment

 

In this case I am not giving rent credits. If I were and the lender would not accept them how is the PA handled. Would you just re-write it with the new owed amount (full amount minus option payment and the rent credits)?

 

Seems like you would have to have a signed PA as part of the initial deal. Is this not the case?

 

Since the actual amount of rent credits credited can change from the total possible, depending on late payments, etc. you really couldn't account for this until the time of closing. How do you handle this? :unsure::rolleyes:

 

 

Thanks!!!

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I have a PA with my T/B that states the full price they have paid. When we signed papers months back I had them sign three docs; a) Purchase Agreement,  Option Agreement, and c) Lease. Now the T/B has started the financing process. They are asking for financing for the balance of what they owe. For example, agree price 150K - 5K option payment = 145K financed. How is this reflected in the closing papers? Does it simply show that I was given a 5K down payment?
It's hard to say with any certainty without reviewing the specifics of the paperwork. Another big factor are the tenant/buyers. Their credit history, employment history, etc. will all play a big role in how much and what type of loan they will qualify for. Someone with an 800 FICO will have a heck of lot easier time getting that full balance financed than will someone with a 450 FICO.
In this case I am not giving rent credits. If I were and the lender would not accept them how is the PA handled. Would you just re-write it with the new owed amount (full amount minus option payment and the rent credits)?
The rent credits would be credited, (deducted), from the agreed to purchase price in the Option to Purchase Agreement. The Purchase Agreement would reflect this new price.
Seems like you would have to have a signed PA as part of the initial deal. Is this not the case?
Definitely not the case. In fact, I was going to ask you why you had involved the extra paperwork in the deal. I see no need for a Purchase Agreement until the property is being purchased. In the meantime, an Option to Purchase Agreement is sufficient.
Since the actual amount of rent credits credited can change from the total possible, depending on late payments, etc. you really couldn't account for this until the time of closing. How do you handle this?
By holding off on that Purchase Agreement until the final figures are known. :rolleyes:

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Okay, to keep the paper trail clear....when collecting option deposit and first month's rent, should they be separate checks?

 

Should I be making copies of checks received before I cash them, or is a receipt noting money paid, for what, and check number sufficient? What "verification" do lenders want to see?

 

Also, do I provide a letter (when the tenant/buyer is exercising their right to purchase) verifying that the tenant/buyer pays rent on time and in full?

 

What all can I do to help a tenant/buyer to qualify for the mortgage?

 

Is there any way to make the purchase price that goes on record the price BEFORE rent credits, sweat equity, etc? I am thinking that the higher the price, the better, especially if I'm doing other deals on comparable houses---my thinking is, the higher sales price on comps, the better, and this might be a comp on my next house--the idea being to make it an "appreciating neighborhood". This is what I'm really fuzzy on.

 

Does anyone know of specific lenders who DO look at rent credits or option deposits as being applicable to the down payment?

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Greetings Everyone,

 

Yes, MC is on target with what he said above.

 

From my experience, most lenders will accept the option money as a sort of downpayment. Investors should not use the word "downpayment' since it gives the impression of a purchase rather than a lease option so be sure to use the words 'option money' in lieu of 'downpayment.' Same applies with any rent credit given...you will just need to find a way to show or prove the amounts.

 

Many lenders like to see cancelled checks for rent as verification of rental history. Some lenders are ok with just a VOR - "Verification of Rent" form which all lenders have. It is a good idea to make photocopies of everything, checks before submitted and cancelled checks, PA's, lease contracts, etc, etc.

 

Lenders are going to compare what is owed to the asking price. This is known in the industry as LTV = Loan To Value. If the appraisal shows a value of $150,000 and the t/b's have paid down $10,000 over the past 6 months (including the option money) then you have an LTV of 93% ( $140,000/$150,000). Generally speaking, the more the borrower has to put down, the better the rates and terms.

 

Lenders should also be ok with you as owner/seller assisting the client and should be happy with that. The only thing that might be of concern is if it is an 'arms length tranaction' meaning that you are selling it to a relative for way under market value or resorting to some other 'creative financing' that they dont like.

 

Hope this is useful to you.

 

Andrew

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MichaelC and Andrew are both on the right track.

 

A lot depends upon the lender. Some lenders will see this as a purchase and some will see it as a refi. It is the same transaction but different lenders see it differently.

 

Same goes with what they will allow. You have to work with a lender who is right for your situation.

 

A few rules that I have tried to pass along is always have your TB pay by check. If they can not get a checking account how will they get a mortgage when the time comes? Yes it is possible to get a mortgage without a checking account but it is harder and requires an even more subprime lender or a higher rate.

 

Explain to your TB's that on time payment of rent will help them get a mortgage so they need to give you a check a day or two before rent is due. You as the landlord should deposit them as soon as you get them. Then if the lender wants cancelled checks they will see the date stamped by the bank. This will show the rent was paid on time.

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Anyone have names of specific lenders who are open to accepting option deposit and/or rent credits as part of "down payment?"?

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