What are your options if the lender does not allow the down payment on a rent-to-own agreement? My lender is saying my down payment is not valid because I pay below market rent.

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

With a rent-to-own home purchase agreement, a portion of your monthly rent payment is supposed to go toward the down payment to buy the home.  For example, if your monthly rent is $1,500, $300 of that payment may be allocated to your down payment.  In an ideal scenario, when it is time to apply for a mortgage to complete the purchase part of the rent-to-own agreement, you should be able to meet the lender's down payment requirement.

This approach, however, only works if you have been paying "above-market" rent, or a higher monthly rent than you would pay for a comparable property in your area.  In short, only the extra portion of your rent payment that is above what you should be paying goes toward your down payment.

If you are paying market or below-market rent, then the lender is unlikely permit the money that was being allocated for the down payment to be applied to the home purchase and you may not qualify for the mortgage. In a worst case scenario, the lender determines that no money from your monthly rent payments can be used for the down payment, in which case you need to come up with additional funds.

Resolving this issue depends on the terms of your rent-to-own agreement, the property purchase contract as well as your lender, mortgage program and qualification requirements.  Despite potential challenges, the following options may help you address the issue and purchase the property.

Provide documentation that shows you paid above-market rent.  The reason the lender is not permitting your down payment is because they think that you paid market or below-market rent.  If you can provide documentation that verifies that you paid higher rent then you should have, then the lender may allow your down payment.  You can do this by comparing your monthly rent to to the rent for similar properties in your neighborhood.

Come up with additional funds for your down payment.  If you have savings or other sources of funds, you can pay for the required down payment on your own as opposed to using the funds allocated by the rent-to-own agreement.  You may also be able to use a gift or down payment assistance program to meet the requirement.

Use a low down payment mortgage program.  These programs usually require you to put down 3.0% or 3.5% of the property purchase price or no down payment in some cases.  This can make it easier to qualify for the mortgage and buy the home.

Review Best Low Down Payment Programs

Ask the seller to reduce the purchase price.  You can negotiate with the seller to reduce the property purchase price.  Paying a lower price for the property reduces both the down payment and mortgage required to buy the property.

Use seller financing instead of a traditional mortgage lender.  Instead of using a traditional lender to obtain a mortgage to buy the home, you can ask the property seller if they are willing to finance the purchase.  In this case, you do not need to meet a lender's down payment requirement because you negotiate the mortgage terms directly with the seller.  Please note that most sellers do not offer seller financing but it does not hurt to ask.

Change lenders.  Your final option is to cancel the loan and see if another lender takes a different approach. You can cancel, or rescind, your mortgage anytime prior to signing loan documents and you are free to work with another lender. While canceling your loan delays the process and you are out certain upfront closing costs, this may be your only approach to getting a mortgage.

If you are considering switching lenders, we advise you to contact multiple lenders in the table below to review your financing options. Be sure to explain all of the details of your rent-to-own agreement upfront to understand if they view your situation differently than your current lender.

Sources

"Standard Eligibility Requirements."  Eligibility Matrix.  Fannie Mae, October 2 2019.  Web.