Can I refinance my property which is under lease option agreement

Question

Hi

If I purchase the property and put the tenant buyer with 2 years rent to own contract ,

Can I refinance the property once I have tenant buyer put in the property , let's say after 6 month ?

I will pay off the loan if the buyer exercise his purchase agreement after 2 years .

Look forward to your advice

Lynn

Lynn Por · Answer

Thanks for the input . If I buy the house in cash in  the contract with least option for 2 years, can I use this house as 100% equity to get a loan let's say 70% of the market value ? In this way, I can use the loan to buy another property . After 2 years, I will pay off the loan of my first property when the tenant buyer choose to buy .

Jeff Rabinowitz · Answer

@Lynn Por, yes you still have ownership so, theoretically, you can refinance. Make sure that is addressed in your contract. However, practically, if you record a memorandum to protect your potential buyer's option it will show on a title search and it may make it more difficult to find a lender who will loan the funds.

If your tenant buyer is well qualified they could exercise their option at any time. You may be pursuing what ends up being a very short term loan. Make sure the costs associated with that loan are worth it.

It is always best to check with a local attorney to make sure your contracts are worded correctly.

Bill Gulley · Answer

Sorry, but the answer is no. You have equitable title interests, not legal title. A lender can give you a loan, but it is not a refinance, it is a purchase money loan and you exercise the right to purchase and the contract to purchase (if they are not the same) and you will go to closing as a buyer.

This means the borrower requirements for a loan will be based on the loan to value as a purchase transaction, not a refinance. Don't confuse your "equitable interests" in title with any equity of being in title, you are not credited with appreciation as your equity, you may have appreciation reflected in a lower sale price as it may appraise for more than you are paying. (But probably not as rent to own to own sellers over price the property since you don't have the property appraised from your lease arrangement, this can also be predatory lending and/or dealing).

As to other credits, a lender only allows amounts paid in excess of fair market rents based on the appraiser's finding the rent amount in the future, not as to what your agreement states. This only pertains to allowances given as credits for loan purposes, if those credits are allowable and you qualify at the required loan to value then the seller may apply all the credits as agreed, these are to separate matters, what is credited as a down payment for a loan and what is agreed to.

This is why most rent to own buyers fail, they assume what the pay is credited to obtain a loan and they are not as contracted, you only find out when the property is appraised so you need to save more in the event your contracted payments are limited to only the excess paid over the fair market rent.

You might also check on the SAFE Act and Dodd-Frank requirements if you are living in that property because giving credit under a contract to the purchase price is a financing contract, regulated by those federal laws and if your seller is not exempt, you may have won a free house or at least. all your money back as rent-to-own stuff is usually not compliant.

I suggest you speak to a lender and let them review your contract. First, you need to know if you have a valid, legal contract, then you need to know what lending requirements must be met. If your contract is not in compliance you can contact the CFPB and your attorney. Good luck :)

Steve Vaughan · Answer

Tough to justify refi costs for a 2-year or less loan.  What is the purpose for your wanting to refi @Lynn Por? Rate reduction?

You can easily do a cost/benefit analysis.  Divide the closing costs by the $ amount of your interest savings per year.  Most have a break-even at about the 3 year mark with a reduction of 50 basis points (1/2%).  Depends on your loan balance and current rate, of course.

Can I refinance my property which is under lease option agreement

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