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Here is my scenario.

Homeowner wants $296,000 Will give me letter stating that I have 20% down payment as a result of rent payments being applied toward purchase price. My question is...does the homeowner have to give me the 20% in cash to offer as my downpayment? Or Could the mortgage be written for the $296,000 but the homeowners only receive $236,800 due to the $59,200 they are taking off the price (20%)

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3 Answers

The home owner will knock 20% off the price of the house.

If the house is worth $297K, then 20% is just a discount your landlord is offering. So your actual purchase price is $237K, and therefore a bank would have to lend you $237K.

Since the house is worth more than the loan, you have equity. 20% to be more accurate. Another way to say is, the bank only wants to loan you 80% of the value of the item securing the loan.

If you default on day one, they can sell the house to somebody else for $296K and get a 20% return on their loan.

So this 20% you are worried about isn't actually money that anybody gives anybody else, it is just a concept.

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You have to be careful with this, because if the buyers banks sees price=$237k they will demand 20% of that as down payment. You need a lawyer to make sure that everything looks OK to all parties. –  DJClayworth Jul 27 '12 at 17:01
    
@DJClayworth - as much as I am now doubting my owner answer, why would the lending bank who is giving money want money? Shouldn't they just offer to lend less? I am not being snarky or defensive, I believe I could be wrong, but it isn't making sense to me either way right now. –  MrChrister Jul 27 '12 at 18:37
    
I would delete my answer (and still might) but I want to finish the discussion in the comments first. –  MrChrister Jul 27 '12 at 18:37
    
No, your answer is correct. The bank typically wants the mortgage debtor to have a significant interest in the house; that's a deterrent to default (the homeowner loses bookoo bux in equity) as well as a hedge against it (yes, the bank can repo the property, sell it, and get their money back). There is one thing; if the house is worth $290k, you owe $230k, and the bank forecloses and sells the house for full price, you are entitled to the surpluse. But, this is unlikely; the bank will likely start the bidding at a price that will mitigate their own costs, and your equity disappears completely. –  KeithS Jul 31 '12 at 0:06
    
So, you have it right; whether the landlord hands you the cash from your rent, or just agrees to knock those payments off the house price, the net result is that the bank only has to put up 80% of the house's value in cash, and you supply the rest either as cash or in pre-built equity. The bank does not receive the down payment; the seller (landlord) does. –  KeithS Jul 31 '12 at 0:09
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I think you need to go to a local bank and ask. The key thing is paper trail. For any mortgage I've gotten on a new purchase, the bank needs to see where the down payment came from and how it got to the seller. In this case, it can go either way. If the value is truly 100% to the 80% you are looking to finance, and the paper trail is legit, this may work just fine. The issue others seem to have is that simply buying at a 20% discount is not a legit way to finance the 80%. Here, it appears to me that the 20% came from you in installments, via the rent.

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But if the value of the home is actually more than the loan, does a bank really need more evidence? (Assuming of course the income and debt ratio numbers are viable). –  MrChrister Jul 26 '12 at 21:41
    
That's why I started with "ask the bank". I can see it going either way. If I offer 20% down, but the appraisal is below sale price, the bank will ask for more down. The opposite should apply. –  JoeTaxpayer Jul 27 '12 at 1:08
    
+1 for "ask a bank". They will be writing the mortgage; they should be able to elaborate on the terms. –  Michael Kjörling Jul 27 '12 at 10:03
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I do not think the bank would consider the 52K as equity. Typically, a rent-to-own lease is technically a lease-option contract where you lease for a fixed amount and at some point during the lease you have the option to buy it at a discounted price.

I think the bank would consider it a negotiated price. I know that those down payment assistance plans are considered price negotiation by the IRS for the purpose of basis cost and I suspect this would be similar where your basis is $236,800 and not $296,000.

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