Mortgage Q&A: Rent to buy isn't grad's only option

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By Henry Savage, SPECIAL TO THE WASHINGTON TIMES

Q: I just finished graduate school and have a good job and a good salary. I have very little money saved up and about $30,000 in student loans that I am paying back to the tune of $500 per month.I want to buy a home right away because I think it's a wise move, but am worried I won't be able to get financing in this tight mortgage market. I have heard that renting with an option to buy is a good plan for first-time home buyers. Can you explain what it is, and would you recommend I go this route?

A: The term "rent with an option to buy" is, indeed, a term that's been around a long time. As far as I can tell, it means just that - someone rents a house and has first rights to purchase the property at a predetermined later date.

While such a plan may be a good thing for a first-time home buyer, the details of the contract will determine whether it's favorable. The phrase "rent with an option to buy" doesn't really tell you anything. There are some details that must be ironed out.

Will the seller agree to a predetermined purchase price? When I bought my first house in Alexandria in 1987, I negotiated a situation that allowed my wife and me to rent the property for 18 months and then purchase at a predetermined price. The real estate market was brisk at the time, so the property appreciated in value during the rental period. By the time settlement came along, the property was worth a lot more than my contract price.

If there is no predetermined purchase price, the seller really isn't offering you anything except the chance to make an offer and purchase his house before he signs on with a real estate agent. This can be a good thing if the seller is willing to sell the property to you at a price that would be at least 6 percent less than what he's willing to take if the property were on the open market. He would be passing the sales cost savings to you.

Will the seller be willing to count some of your rent toward the down payment? In my case, all of the rent I paid during the year and a half we lived in the property before we purchased counted as a down payment.

Under this scenario, check with a qualified mortgage officer and make sure this form of down payment is acceptable. Many lenders won't use 100 percent of the rent payments toward down payment for the purpose of calculating the mortgage amount.

Perhaps you can negotiate a discounted rent in return for a solid contract. This gives the seller rent revenues as well as sale assurance.

The bottom line is that these sorts of long-term arrangements can mean very different things once the details are ironed out. Moreover, at the end of the rental period, things may have changed. You may find that you don't like the house or the neighborhood. Or perhaps the real estate market declined, making an agreed-upon purchase price too high.

Arranging a rental contract with an option to purchase can be favorable if the details so dictate. My advice would be to speak with a qualified loan officer who may be able to lay out a plan where you can purchase now. There are still plenty of programs available that only require a 3 percent to 5 percent down payment in most areas for folks with good credit. These programs also allow seller contributions of up to 6 percent to cover closing costs. A contract can be structured that requires a buyer to come up with a surprisingly small amount of money.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@ pmcmortgage.com.