As long as your rent with an option to buy agreement is structured properly, it should not limit your financing options when you apply for a mortgage to buy the property in the future. As we explain below, properly documenting the transaction is very important when it comes time to qualify for a mortgage.
First, the rent with an option to buy agreement must clearly outline what portion of your monthly payment is allocated toward rent and what portion is allocated toward your down payment. For example, if your total monthly payment is $1,200 and $200 of the payment goes to save for your down payment, that should be clearly stated in the agreement. Although not always necessary, it is also very helpful if the property owner establishes a separate bank account to hold the down payment funds.
It is also important to verify that the rent portion of your monthly payment is based on market rents for your area. Using the same example as above, if $1,000 of your $1,200 monthly payment goes to pay rent, then this figure should be consistent with rental rates for similar properties in your area.
Lenders want to make sure that the amount of your monthly payment that is allocated to your down payment is fair and not artificially inflated by paying below-market rent. You can verify market rental rates in your area by checking rents for comparable properties. For example, if your property is a one bedroom single family home with a yard, review the rents for other one bedroom properties in your general neighborhood.
Another point to keep in mind is that the purchase price stated in the agreement must be based on the current market value of the property and not the anticipated property value in the future. Lenders want to ensure that the agreed upon purchase price and down payment reflect the fair market value of the home because predicting future property values can be highly challenging.
In closing, as long as your rent with an option to buy agreement is structured properly and you document the transaction, including all payments, you should be able to qualify for a mortgage when you decide to purchase the property. Maintaining the right paper trail and establishing the agreement using a market-based property value and monthly rental rate best positions you with lenders when you apply for the loan in the future. In short, when it comes to getting a mortgage, the more documentation, the better, especially if the transaction is somewhat unusual.
The table below shows top-rated lenders near you. We advise you to contact multiple lenders to understand their qualification guidelines for financing the purchase of a home using a rent with an option to buy agreement. Plus, shopping lenders enables you to find the best mortgage terms.« Return to Q&A Home About the author