Using Rental Deposit as a Down Payment in a Rent to Own Situation ...

[Anonymous]

Hello all, hope everyone is having a good holiday season!

I have been renting a single family home for almost a year now.

The owner/landlord and I have discussed the idea of my purchasing the house from him at a later date.

My question is in regards to using the rental deposit (first and last month's rent, and not an insignificant amount) as part of the down payment.  How do we need to structure/document this so that it does not appear to the lender that the owner is gifting me the down payment money?  Since this is no longer allowed, correct? 

Is the lease language good enough, or does he have to show that this money was physically in an escrow account all this time?

How would the money then get released to become the down payment?  What would be the process?

Thanks,

-RT

[ShanetheMortgageMan]

You'd document that there was monies deposited upfront (security deposit, 1st/last months rent) by providing a copy of the lease/rental agreement outlining those terms.  However since you've already moved into the home, I don't see how the landlord would apply the 1st months rent to the down payment since the money you put down initally for "1st months rent" was taken from the account when you started living there - no?   At least when I rented that is how my 1st months rent was applied, and then my last month's rent was applied the same way... when I gave 30 days notice, it was used to pay that last month's payment.

So either you are going to have to create an addendum to the original lease/rental contract stipulating that you'd get a refund of your last months rent, or it'd be directly applied as earnest money/down payment, if you were to convert the rental contract into a purchase contract of some sort.

To make it easiest, you'd would want to seperately put the money down, so it wouldn't be coming from the sellers account.  Have a paper trail of everything along the way.  Sellers account -> to your account -> as earnest money placed into whatever the common trust fund handling process is for your state.

[Watchmann]

Every place I've ever rented, and there have been many, the 'one months deposit' is NOT the last months rent.  Rather it is there to protect the landlord when you move out and if there is damage to the unit that will be used to make repairs.   It was always spelled out in the lease that this deposit could not be used to pay the last months rent, and the deposit would be refunded AFTER you moved out and the property was returned in good condition.  Of couse many people just don't pay the last months rent and apply it to the last month.  And the landlord isn't in much of a position to do much about it.  Your lease may well be constructed so it is considered the 'last month's rent', but read the fine print.  Either way an addendum can be written so the landlord can refund the money to you now. 

[ficoschmico]

you are able to use the security deposit as down payment. this would not be a gift as it is your money already.  the snag would be if the lease language called it 1st and last months rent. then it wouldn't be able to be used as down payment without the aforementioned addendum to the lease.  if you draw up a rent to own addendum you might as well call it rent credit. It would amount to the same thing in a "decent" underwriters opinion.

Good Luck.

[Anonymous]

Ah, that was the information I needed. 

I may have mispoke regarding security deposit and first month's rent... d'oh.

Basically it is last month's rent, and a one month damage deposit. 

But yes, I will have to re-examine the exact lease language to make sure that it is worded correctly. 

So this money doesn't have to be "seasoned" after I receive it back from the landlord for the down payment?

Thank's all.

[ShanetheMortgageMan]

Money either needs to be seasoned or sourced, so if the source is acceptable (which it would be if you can document it properly) then no seasoning is required.