"Does the Rent I've Paid on a Rent-to-Own Home Count Toward My Down Payment?"

Near the end of a rent-to-own purchase, the appraisal includes a figure most home appraisals leave out, the rent the home would bring on the open market. Your lender lays that number beside the rent on your lease to see how much of the credit on the landlord's ledger can move into your down payment.

Yes, part of it can count. Fannie Mae, Freddie Mac and FHA all let a lender credit rent you have already paid toward your down payment, up to the amount you paid above the home's market rent. The appraiser sets that market rent, and the credit needs a written rent-to-own agreement backed by records of every payment.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. This article is for you if you are renting a home right now under an agreement that lets you buy it later, or if a landlord has offered you one and you haven't signed yet. If your landlord offered to sell you the home you already rent and there is no purchase agreement in place, the article on buying the home you rent from your landlord covers that conversation. This one is about the credit inside a written rent-to-own agreement, and what a lender can do with it.

Rent-to-own, lease-purchase and lease-option, in plain terms

You'll hear a few names for this arrangement: rent-to-own, lease-purchase, lease-option, or a lease with an option to purchase. In each version you sign a lease on a home, and the same paperwork, or a second document signed alongside it, gives you the right to buy that home later. The details change from one agreement to the next, and the agent or attorney who drafted yours is the right person to explain exactly what you signed.

A lender looks closely at the rent credit, which is the slice of each month's rent that the agreement says will go toward the purchase. Fannie Mae's page on rent-related credits describes it as the portion of your rental payments credited toward the down payment under a documented rental or purchase agreement. Once you apply for the loan, the lender decides how much of that credit counts as money you actually put into the home.

The market rent cap, and the appraiser who sets it

All three of the big rulebooks measure the credit the same basic way. The appraiser who values the home for your loan also gives a figure for what it would rent for on the open market, which is called the market rent. The lender compares that figure with the rent you actually paid each month, and the difference between the two is the most it can count.

From the lender's side, the rent you paid at the going rate covered a place to live, the same as any tenant's rent. The amount you paid on top of that is the part that worked like savings toward the purchase. So if your agreement credits more each month than you paid above market rent, the extra stays out of the down payment math. If your rent was at or below market rent, there is no difference to count at all.

Two more details on a Fannie Mae loan work in your favor. You don't have to put in a minimum amount from your own funds before the rent credit can count toward the down payment. And the credit is not treated as an interested party contribution, which is the term for money a seller or someone else connected to the sale puts toward your costs. Those contributions have limits of their own, explained in the guide to seller concessions, and the rent credit doesn't use them up.

Freddie Mac uses the same cap in its guide to your own funds, and it also wants the agreement to have an original term of at least 12 months, with at least 12 months of rent paid under it. On a Freddie Mac loan, the credit can go toward your down payment, your closing costs, or both.

Does rent-to-own count toward a down payment on an FHA loan?

FHA works on the same idea. FHA's handbook counts "the amount of the rental payment that exceeds the Appraiser's estimate of fair market rent," and the lender can put the total of those amounts toward your minimum required investment. That is the share of the purchase FHA asks you to put in yourself, which the handbook sets at "at least 3.5 percent of the Adjusted Value of the Property."

On an FHA loan, a credit bigger than what you overpaid, or rent set more than 10 percent below the appraiser's market rent, can lower the value the loan is figured from by that amount, so the same price supports a smaller loan. The handbook makes one exception for below-market rent, when you are buying from a family member.

VA's lender handbook doesn't lay out a rent-credit rule the way these three do, so on a VA loan you'll want the lender's answer on the credit in writing before you count on it.

The table puts the three side by side.

	Fannie Mae	Freddie Mac	FHA
What counts	The rent credited under the agreement, up to what you paid above market rent	The rent credited under the agreement, up to what you paid above market rent	The total you paid above fair market rent
Where it can go	Down payment or minimum contribution	Down payment, closing costs or both	Minimum required investment
Length of the agreement	Original term of at least 12 months	Original term of at least 12 months, with rent based on at least 12 months of payments	No minimum term in the rent-credit section
Who sets market rent	The appraiser, in the appraisal	The appraiser	The appraiser
Proof of payments	Canceled checks, bank statements, money order receipts or another reasonable method showing who was paid and how much	Evidence of the rental payments	Evidence of receipt of the payments

Writing the rent-to-own agreement so the credit counts

If you haven't signed yet, you have the most room right now. On a Fannie Mae loan, the agreement has to show an original term of at least 12 months, the total number of months, the monthly rent, and the amount of the monthly rent credit. An agreement that only says some of the rent will be applied at closing leaves the lender without a number to work from, so you'll want the credit written as a dollar amount for each month.

The rent itself matters as much as the credit. If you and your landlord both want the full credit to count, the monthly rent has to be above what the home would rent for on the open market by at least the amount of the credit. The appraiser's figure comes later, so nobody can promise you the final number in advance, but your agent can look at what similar homes nearby rent for while the agreement is still a draft. I'm happy to look over the credit terms with you before you sign, because changing a draft is a lot easier than changing a signed agreement.

Some agreements also ask for an upfront payment for the right to buy, often called an option fee. That payment is a separate item from the monthly rent credit these rules describe, so I'd want to see your paperwork before saying how it reaches the loan file.

Records that prove every rent payment

The lender needs to see each payment over the life of the agreement, and the records have to show who was paid and how much. Paying from your own bank account to your landlord by name, on the same schedule every month, gives you a clean record without any extra effort. Rent paid in cash with no receipt leaves nothing that shows the payee and the amount.

Please provide the complete rent-to-own agreement, every page and any amendments, along with your bank statements for each month of the agreement, all pages, even if the last page is intentionally left blank. We will need them to show each rent payment leaving your account and going to your landlord in the amount the agreement lists.

Steps from signing the agreement to closing on the home

Before you sign, you'll want the agreement to state its length in months, the monthly rent and the monthly credit as dollar amounts. During the lease, paying the same way every month keeps your records simple, and keeping a copy of the signed agreement where you can find it saves a search later.

As you get close to buying, the next step is to get pre-approved, and please tell the lender about the rent-to-own agreement in the very first conversation. That way the market rent figure is part of the appraisal order from the start. The appraisal then gives the lender both the home's value and its market rent, and from those the lender works out how much of your credit counts. The part of the down payment the credit doesn't cover, along with your closing costs, comes from your own funds or another eligible source.

Mistakes that shrink the credit

Because the credit is a slice of the rent itself, rent set right at market leaves the lender nothing to count, even when the agreement still lists a credit every month.

Fannie Mae and Freddie Mac both look for an original term of at least 12 months, so a six-month lease that was renewed later may not meet that rule even if you have lived there for two years.

If a few months of rent were paid in cash or from someone else's account, those months are hard to show, and the lender can count only the payments it can document.

It also helps to plan on the credit covering part of the cash you need, with savings or a gift making up the rest. The article on getting from renting to owning walks through the other pieces of money involved in that move.

An example with made-up numbers

Numbers below are made up to show the mechanism. They are not a quote and not anyone's transaction.

A client rents a home for $2,100 a month under a 24-month rent-to-own agreement that credits $400 of each payment toward the purchase. At purchase time, the appraiser puts the home's market rent at $1,900 a month.

Monthly rent paid                      $2,100
Market rent, from the appraisal        $1,900
                                       ------
Paid above market rent each month        $200

Credit the agreement lists               $400 a month
Most a lender can count                  $200 a month
Months of payments                          24
                                       ------
Rent credit the lender can count       $4,800
Credit the agreement promised          $9,600

The agreement promised $9,600, and a conventional lender can count $4,800 of it. On a Fannie Mae loan that $4,800 can go toward the down payment, and on a Freddie Mac loan it can go toward closing costs as well. On an FHA loan the $4,800 can go toward the minimum required investment. Because the $400 monthly credit is more than the $200 paid above market, FHA's rule on excess credits can also lower the value the loan is figured from.

If the rent in the same agreement had been $1,900, which is right at market, the lender could count nothing, even though the paperwork still listed a $400 credit every month.

As you get close to buying, you can see rate options for the home you're renting with no credit pull and no account. You choose a rate option, and the application opens from there. The option you choose can change, so looking doesn't lock you into anything. If you'd rather talk through your agreement first, I'm glad to take your call.

Nothing here is a loan approval, a denial, or a commitment to lend, and none of it is legal advice. Your agent or attorney drafts the agreement, and the lender reviews it against the rules for your loan.

Common questions

Does rent-to-own count toward a down payment?

Part of it can. Fannie Mae, Freddie Mac and FHA all let a lender count rent credit from a written rent-to-own agreement, but only up to the amount you paid above the home's market rent, which the appraiser sets. If your rent was at or below market rent, there is nothing for the lender to count, whatever the agreement lists.

How is rent credit calculated on a lease with an option to purchase?

The lender takes the rent you actually paid each month and subtracts the market rent the appraiser gives for the home. That difference is the most it can count for each month, even if the agreement credits more. The lender multiplies the countable amount by the months you paid, using your payment records as proof.

Does FHA allow rent credit toward the down payment?

Yes. FHA's handbook lets the lender put the total of the rent you paid above the appraiser's estimate of fair market rent toward your minimum required investment. It needs the rent-with-option-to-purchase agreement, the appraiser's market rent estimate, and proof that the payments were received. An excess credit or below-market rent can reduce the price the lender uses.

What documents do I need to use rent credit for a mortgage?

The lender will need the complete signed agreement, showing its original term, the total number of months, the monthly rent and the monthly credit. You'll also provide canceled checks, bank statements or money order receipts showing each payment, who was paid and how much. The appraisal adds the market rent figure.

Can rent credit pay my closing costs?

On a Freddie Mac loan, yes. The rent credit can go toward your down payment, your closing costs, or both, as long as the agreement had an original term of at least 12 months and the rent is based on at least 12 months of payments. Fannie Mae's rule names the down payment and the minimum contribution.