Rent Credits

[MikeT/NC 5]

I talked to a broker today concerning rent credits. According to him the only rent credit allowable would be anything above market rent. And then only up to 3% of the purchase pirce. At least with Freddie and Fannie. So that would pretty much rule out offering a fairly large rent credit. Did I misunderstand him or did he misunderstand my question. Is that what you guys are dealing with.

[MichaelC 160]

Hi, Mike. You're both right. . .depending upon how rent credits are treated. If you are treating rent credits as a credit towards the purchase price, (as you should be doing), then you can offer whatever percentage you want. But if you trying to get those credits to be part of the t/b's down payment, then it potentially becomes an issue as the Broker described.

[pilot76180 51]

The Money Honey can give you more input on this that might help.

Our docs only state that at the time of purchase the seller is giving X amount towards fund to close, so it doesn't mention a rent credit.

[EnvisionResults 0]

I advise the lease option companies to not use the term rent credit any where in their contracts. The broker is correct - if the term rent credit is used in the contract it would require a market rent analysis. In most cases - this will not work for the TB as the rents are set at market rate and therefore there is no room for the credit.

 

The "rent credit" can never be applied to a down payment because it is not actual money that can be supported and documented by the Borrower (as money from their own bank account or a gift from a relative). However, it can be used as a seller contribution. At this time maximum allowable contribution is 6% FHA and 3% Conventional. We typically modify the contract at the time of financing (and get all areas changed initialed by the Tenant and Seller) that take the monthly earned credit and total it.

[MikeT/NC 5]

Okay, Lets say these are the facts as we know them on a one year L/O

142,200 Amount seller wants to net.

1,000 Market rent for like houses in this area.

1,200 Amount of rent T/B will be paying.

3,000 Option fee

2,400 Amount to be credited towards buyer's Down Payment ( 200x12 months) amount above market rent

150,000 Asking Price

7,200 50% rent credit (1200 times x12 / 2)

4,800 Amount of rent credit credited towards purchase price.(7200 minus the 2400 of the rent credit that's used for down payment)

 

So using MC's docs the 150,000 would go on line 1c

400 would go on line 1d.

3000 would go on line 3

So if you subtract the 3000 OC and the 4800 RC then the seller would net out 142,200. Or would the 2400 also be taken off the asking price netting the seller 139,800.

Which figure and on what line would this go on the HUD-1?

Thanks, Mike

[MikeT/NC 5]

Thanks, Money Honey, you posted while I was formulating my post so you have answered some of my questions. Still not sure if my facts and figures are correct in my previous scenario.So If I now understand it. If the price is 150,000 and the rent is 1,200 per month and I offer 30% rent credit then the purchase price will be lowered by 4320.And if you add in the 3,000 option fee to me the seller would now net 142,680. Right? So how much would the buyer have to bring to the closing table? Approximately of course.

[pilot76180 51]

The rent credit would be applied to the buyer's closing costs, not price reduction as the lenders wouldn't allow that.

However, if you are trying to gauge what the owner will have prior to closing costs, you would subtract the option fee and the rent credits from the option price to get that figure.

For simple numbers, let's assume you are not giving the owner any of the option fee.

 

So,

$150,000

-$3,000 option fee (which would apply towards the required down)

=$147,000

-$2400 rent credit which would reflect as a seller concession

= $144,600 is about where the owner would be prior to closing costs and payoff of course.

 

The closing costs vary depending on the time of the year due to pro-rated taxes etc., however, The Money Honey can discuss those further if she sees this.

[MichaelC 160]

The rent credit would be applied to the buyer's closing costs, not price reduction as the lenders wouldn't allow that.

Or once the t/b decided to exercise their option to purchase, you could rewrite the terms in the purchase agreement to reflect that net purchase price when the rent credits are factored in.

It comes down to all parties being on the same page and wanting the same thing: the deal to close.

[MikeT/NC 5]

Okay, so now I'm more confused than ever. I thought the whole reason for rent credits was to make the deal look more attractive to a buyer by lowering the price of the home. But who actually pays the bank ? If I just raise the price of the house by 2K and then give the TB a 2K rent credit towards closing cost then no real money has changed hands. The seller doesn't save the 2k and bring it to the closing table does he? And what about down payment. If the bank wants a 10% down payment then the buyer has to bring that much money and give to the bank at closing? Right?

[MichaelC 160]

Okay, so now I'm more confused than ever. I thought the whole reason for rent credits was to make the deal look more attractive to a buyer by lowering the price of the home.

That's correct. If the rent is $1K/mo and the rent credit is 50%, that's a $6K credit towards the agreed to purchase price. On a, say, $100K house that's 6%. Not an insignificant amount for most folks.

The seller doesn't save the 2k and bring it to the closing table does he?

No.

And what about down payment. If the bank wants a 10% down payment then the buyer has to bring that much money and give to the bank at closing? Right?

If the lender is requiring ten percent down then, yes, the buyer would need to meet that requirement. That's why it's a wise and necessary move by the t/b to begin preparing for financing soon after settling in, and wait until week 50 of a 52 week lease. They need to sit down with a mortgage broker or three and discuss their options and possibilities so when the times comes to buy they are ready to do so.

[ErikOk 10]

The Money Honey can give you more input on this that might help.

Our docs only state that at the time of purchase the seller is giving X amount towards fund to close, so it doesn't mention a rent credit.

 

John,

 

I think you posted the wording in your contract reflecting the money as seller contribution instead of rent credit. I can't seem to find the post. Can you please repost here?

 

Thanks,

Erik

[pilot76180 51]

http://www.naked-investor.com/forums/index.php?showtopic=8386&hl=

[ErikOk 10]

Thanks

[MikeT/NC 5]

Let me try this again. Rent credits can't be called rent credits. But you could offer the t/b some sort of incentive to pay rent on time and in full, then credit them x amount when they exercised. However this amount can't exceed 6% FHA. No matter if the L/O term was for 10 years they still can't build up but 6%. This 6% can be used as a seller concession to be used only for closing cost and not to reduce the purchase price or as a down payment. The option money can only be used to reduce the price of the house and has nothing to do with a down payment as the bank will still require you to come to the table with your own down payment money.The only other way that the net affect of rent credits could exceed 6% would be to have an addendum to the option TPC signed , at the time of signing the original OPTC , stateing that any amount over the 6% earned would go towards lowering the purchase price.

 

So if the TBs closing cost are 5k and his rent credits equal 5k then this 5K is just rolled into his loan and he pays no out of pocket expense to close. Except for DP of course.

[<Steve> 82]

Wow, I think I would just say that the rent credits lower the purchase price and the option consideration may or may not go towards the down payment; dependant on the type of financing the t/b gets. And leave it at that. If the seller and t/b need to amend or rewrite a purchase agreement to make things work that is between them and the mortgage broker.