5% Down Payment and Rent-to-Own? Sure you can!
By Sherylinn Milsom
Why is it starting to be challenging for Rent-to-Own tenant-buyers to buy out with 5% down? Is it a challenge with proof of down-payment? How should we prepare to avoid this problem and still buy with 5% down?
The only answer that I have is: mortgage insurance. I have had many applicants to our lease-option program that have been “pre-approved” by banks but then get refused by CMHC. If a person has mediocre credit, then he really must have at least 10% down in order to get approved. People with decent credit can still get a 5% down mortgage, but most people in a lease-option don’t have a decent score.
Of course, there are two other mortgage insurance companies, and I believe that they may be a bit less strict than CMHC, but not every lender uses the other insurance companies. And (to my knowledge) mortgage brokers are unable to request that a file be sent to a specific insurance company.
So the only way to get a 5% down mortgage is to have a credit score in the high 600’s as a minimum (and that number is only a rough guideline that is subject to change).
Proof of down payment should not be an issue if the tenant-buyer has paid option payments separately from rent payments and both the RTO company and the tenant-buyer can show a paper trail. Also, option payments must be over and above fair market rent. If market rent is $2000, and the RTO company says that it will only charge $2000 with $500 of that being “credited back” to the buyer, that credit will not work as a down payment. The credit may reduce the purchase price, but the buyer will still have to come up with a down payment.
Sherylinn Milsom has been a REIN member since 2007 and has built a real estate business from simply having a few rental properties to being a major player in Alberta’s Rent-to-Own industry. Come see Sherilynn sharing her Rent-to-Own expertise with others who are in the trenches creating wealth through creative buying strategies and Barry McGuires Rapid Cash Flow Program in Edmonton on June 20-22, 2014.
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