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When a lease purchase or rent to own tenant buyer goes to purchase do they need 20% down on the mortgage?

I have been investing in subject to real estate for a few years now, and someone told me a good way to sell a home I secure through a subject to deal would be through a lease purchase or rent to own contract. The idea sounds good, and I have been aware of the lease purchase contract. What I'm wondering about is the mortgage a lease purchase tenant buyer would need. On a rent to own a tenant buyer would only put a small down payment on the house, say 2 or 3% of the purchase price. When they go to exercise their option to actually purchase, not just rent, do they have to put down an additional 20% to secure a mortgage like if they had got a mortgage in the first place?, Or is there a loophole for a no or low down payment because they've been showing a commitment to the house? Any input from lease 2 purchase investors or a mortgage professional would be greatly appreciated! Thanks

Public Comments

1. It depends on what the mortgage company or owner require.
2. At least some lenders will consider the equity earned during the lease option period to be a legitimate source of funds for the purchase. The theory there is that once you get a contract to purchase at a future date and price, you have a tangible asset that grows as the value of the property grows. Sort of akin to a savings account assuming you exercise the option. You'll have to call around and find out who sees it that way and who doesn't. Hopefully they will have an option price significantly lower than the lenders appraisal when they go to finance the property and might not have to make any additional cash downpayment. The first part of your question doesn't make much sense to me. What do you consider "subject to" real estate to be?
3. Well it sounds like you're talking about two different things. If they rent to own, they would provide whatever amount the seller wanted as a down payment and they would make rent payments for the term of the rent to own agreement. Let's say two years, the rent amount would count to lower the overall agreed to purchase price. At the end of the 2 yrs, they would go for a mortgage to pay the seller off. Now the new mortgage terms do not affect the seller. So the 20% you asked about isn't a consideration for the seller. He will have nothing to do with the buyers procuring a loan. A contract for deed (same as seller financing) is handled differently, in that you have to record the deed. If they aren't able to purchase at the end of the contract for deed terms, foreclosure would have to take place. And the seller could sell the contract to another person or entity. This scenario provides the buyers a chance to procure a loan at any time and pay off the contract for deed. What I do suggest is that you use an attorney to draw up the paperwork and to make sure all parties understand the rules, laws and guidelines in the contract. What each parties rights are, etc.
4. Not really, it depends on your borrower's ability to get a loan. There are loan programs that would treat this as a refinance for your borrower instead of a purchase. This means they can use equity between the appraised price and the purchase price. They can also use their downpayment money they gave to you at the start of the land contract and any portion of the rents that you both agree to deduct off the purchase price. I've typically done this type of a loan for a borrower who was on a land contract for a year and it's generally a great way to get someone into a home if they've had past credit issues but are financially stable now. Of course with the direction of the current market, there's no guarantee these programs will work like this in a year's time...so there is a significant risk to the borrower that they might not be able to get financed in one year. Your land contract should address that possibility.