December 3, 2013
A reader asks, “If leasing a property that you intend to purchase can part of each month’s rent go towards the full downpayment amount?”
The short answer to this question is, “It depends”.
Much depends on whether or not such rent credit meets FHA loan requirements. The FHA loan rulebook, HUD 4155.1, states that rent credit could be considered a legitimate source of down payment funds, but only if certain standards are met.
This information is found in HUD 4155.1, Chapter Five Section B, which says, “The cumulative amount of rental payments that exceed the appraiser’s estimate of fair market rent may be considered accumulation of the borrower’s cash investment.”
FHA instructions to the lender in these cases include the following:
“The endorsement package must include the
• rent with option to purchase agreement, and
• appraiser’s estimate of market rent.
Conversely, the underwriter must treat the rent as an inducement to purchase, with an appropriate reduction to the mortgage, if the sales agreement reveals that the borrower
- has been living in the property rent-free, or
- has an agreement to occupy the property at a rental amount considerably below fair market value, in anticipation of eventual purchase.”
As with many other FHA loan rules, there are sometimes exceptions. In this case, the FHA provides an exception, “when a builder fails to deliver a property at an agreed-to time, and permits the borrower to occupy an existing or other unit for less than market rent until construction is complete.”
These rules may not cover every single situation where rent credit is applied, and not all rent credit is eligible to be used as part of the down payment for an FHA mortgage. In areas like these, borrowers should assume the details are handled on a case-by-case basis and discuss the situation with a loan officer.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get preapproved for an FHA loan at www.FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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