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Whether you’re a renter or an investment property owner, take the time to become familiar with what’s called “rent credit.”

In fact, if you’re living in the same home that you purchased many years ago, you should still also learn more about rent credit because its use may impact your neighborhood as well.

Basically, in a tight housing market, there are all sorts of forces that influence market conditions, but rent credits often go overlooked.

According to Fannie Mae, “a rent credit is used with the option to purchase a home and is an acceptable source of funds toward the down payment or minimum borrower contribution.”

Even better, you’re not required to make a minimum borrower contribution from your own funds when any of your rental payments are credited toward your down payment.

This works great when you’re renting a home that you want to buy.

For example, any rent credit that you accrue during the time of your lease or rental period can be applied toward your down payment on the home you’re buying by calculating the difference between the market rent and the actual rent you paid for the last 12 months.

The caveat is that the market rent of the home you’re renting, yet soon to be buying, needs to be determined by a licensed third-party appraiser, and it’s common for the length of your rental agreement to fluctuate too.

If this sounds like an option that can help with your home- buying plans, then you’ll need to be prepared.

Your lender will likely need to obtain a copy of your rental and purchase agreements to confirm you’ve had a minimum original term of at least 12 months.

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The agreements will need to clearly state the monthly rental amount and specify the terms of the lease.

Lastly, copies of your canceled checks or money order receipts for the last 12 months are needed to verify your rental payments.

Now here is where things might get interesting.

Assuming you are already a homeowner, if you are in a neighborhood where there are several of these “rent credit” transactions taking place, then you generally won’t find out about them until they are closed.

Since these transactions are commonly taking place behind the scenes between the owner and the tenant, the final sales price could surprise you.

If you’re in the middle of refinancing your home or perhaps thinking about selling your property, would the “rent credit” transaction hurt or help you?

While direct owner-to-tenant transactions have been happening forever, it’s the timing of them under certain market conditions that could have the most impact in your community.

Not to mention, what about investment property owners who are collecting higher than normal rents after the devastating fires?

How does that facilitate their applications for larger home financing amounts or ultimately make their rentals more marketable to resale?

You must take your time and look carefully at all of your neighborhood details with an experienced local Realtor.

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Chris Salese can be reached at chris@delsurmortgage.com or 707-363-4439. He is a licensed California mortgage lender (LO NMLS #254469 — CA-DBO #254469 Corp NMLS #1169 Equal Housing Lender.

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