lease-purchase agreement - time to get mortgage - need advice

[Anonymous]

Hi, we are nearing the end (Dec. 2009) of a 18 month lease purchase agreement. Selling price for single family home @ $365,000. Through lease purchase contract we have accumulated 5% down. We have cash for closing costs. No real cash reserves afterwards but 401k of about $40,000. Our DTI will be about 24% on the front and 38% back assuming the mortgage, PMI, taxes, insurance will be about $3,000. Credit scores from low of 640 to high 680. Will this prove difficult? Impossible? Thanks!

[ShanetheMortgageMan]

The amount of the rent that you've paid that the lender will allow to be credited to you at closing, called "rent credit", will be the lesser of:

1.  The specified amount in the lease-to-purchase contract that is to be applied as a credit to you at closing

2.  The amount you pay in rent, minus the "market rent", and then it's the lesser of:

a. that difference

b. the specified amount in the lease-to-purchase contract that is to be applied as a credit to you at closing 

It's not as simple as you having a lease-to-purchase contract saying you pay $2,000/mo and $250/mo is credited to you as a "rent credit".  The market rent is determined by an appraiser who does a "rent survey" in addition to the normal portion fo the appraisal, rent survey is usually an additional $75-150.  Rent survey includes all of the rentals in the area and the rent they are charging.  So if the rent you are paying now is the market rent, the lender will not acknolwedge the amount in the lease-to-purchase contract.

However.... if that is indeed the case, instead of trying to use that money as down payment funds, you can have the seller credit you that same amount towards your settlement costs.  Settlement costs shouldn't come out to $18,250 (5% of $365k), probably more like $9-12k at most, if you can "buy down" your interest rate by paying discount points (1 discount point = 1% of the loan amount) to take advantage of the full $18,250 credit that you and the seller have agreed on.

How the rent credit in the lease-to-purchase agreement is treated is going to boil down to the rent survey. 

Other than that, sounds pretty good.  If you don't have funds for the down payment, a loan from your 401k, or gift funds from family/relatives can be used. 

[Anonymous]

Thanks for the info, I did not know about the rent survey but I think we will be fine in that category, we are paying well above what rent goes for in my area for a comp property. And some of the downpayment credit was a large deposit at beginning of lease.

What about my credit scores? Wife's are similar. They have me worried... I keep seeing how you have to have at least 680. FHA not an option I don't believe b/c of the purchase price. Scores are low i think due to a lot of credit card debt, but my last late payment on any account (it was a credit card) was 2003, so I have a good payment history, as does wife. I've had a mortgage before, no late payments ever there. Her main reason her's is low is her credit history isn't terribly old, but she doesn't have a lot of debt and has only had like one late credit card payment ever.

The only way I can think of to raise scores is to pay off at least half of credit card debt, perhaps with a loan/gift from a relative? I've read that will give your scores a good boost. We are still 4 months out from needing to close, so would that be a big deal to do that now, and would scores react in time when I start the mortgage process in I guess 3 months to be able to close by end of year? Or should I not worry about mid-600 scores b/c I'll be fine?

Thanks for all the advice!!

[Anonymous]

If FHA is not an option you'll want to get those scores up. I think 720 is what i've read is where you want to be for a conventional loan. The other problem might be the downpayment though because i believe conventional usually requires more than 5%. If your problem is credit card utilization, paying those down will help a good deal. If you can get them under 10% utilization can may see a jump up to 60 points. They'll ask for 2 or 3 months bank statements though so if you are depositing money you'll want to do that pretty soon, otherwise it will need to be explained/documented.

Here's a link to check on FHA limits in your area http://www.fha.com/lending_limits.cfm

[Anonymous]

I've got some late payments from 6 years ago on a couple closed credit cards..... does it make any sense to send goodwill letters to them asking for the late payments to be removed, and will it even make a difference in credit score considering how old they are?

Thanks again for all the wonderful info!

[ShanetheMortgageMan]

I doubt removing those would have much of an affect on your score, way too old.  I've seen people with collections & charge-offs from 4-5 years ago that still have 720+ scores today.