How does a rent with an option to buy agreement affect your ability to get a mortgage when you decide to purchase the property?
As long as your rent with an option to buy agreement is structured properly, it should not limit your financing options if you apply for a mortgage to buy the property in the future. For rent with an option to buy agreements, properly documenting the transaction is very important when it comes time to apply for a mortgage.
First, the lease agreement must clearly state what portion of your monthly payment is allocated toward rent and what portion is allocated to saving for your down payment. For example, if your monthly payment is $1,200 and $200 of the payment goes toward saving for your down payment, that should be clearly stated in your rent with an option to buy agreement. Although not always necessary, it is also very helpful if the property owner establishes a separate bank account for holding 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 your monthly payment is $1,200 and $1,000 of that payment is allocated to rent, then your $1,000 monthly rent contribution should be consistent with the rental rates 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 monthly rent that is below market. You can verify the market rental rate in your area by reviewing a sample of rents for similar properties.
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 value of the property in the future. Lenders want to ensure that the agreed upon property purchase price and down payment reflects the current fair market value of the property because future property values can be challenging to predict.
In short, 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 if you decide to purchase the property. Maintaining the right paper trail and establishing the agreement using a market-based property value and rental rate best positions you with lenders when you apply for a mortgage in the future.
We always recommend that you contact multiple lenders to understand how they would handle your unique situation as well as the your rent with an option to buy agreement. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as qualification guidelines vary, especially as it relates to rent with an option to buy agreements. Plus, shopping lenders is the best way to save money on your mortgage.
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