My tenant-buyer's lender is refusing to count $10,500 of rent credit

Question

Structure I inherited when I bought into this position: 36-month lease option on a single family, rent $1,750, of which $350 a month is credited toward a $265,000 strike price, plus a $6,000 option fee that the contract says applies at closing. We're 30 months in and the tenant-buyer finally has the credit score to go conventional.

Her loan officer came back and said the credit can only be recognized to the extent rent exceeded market rent, and the appraiser put market rent at $1,600. So $150 a month, and only for the last 12 months, which is $1,800 instead of $10,500. Everything else he says is nothing, not even a seller concession, because it looks like she paid herself.

Two things I want to understand from people who have taken one of these all the way through underwriting. First, is there a way to document credits up front that survives that market rent test, or is the excess-over-market rule just the ceiling and the rest of the credit is only ever a price reduction? Second, does the $6,000 option fee get treated as down payment funds, or does it need to have sat in an escrow account somewhere to count for anything? Our contract doesn't say where it went, which I don't love.

Rena Expert · Accepted Answer

The excess-over-market test is the usual mechanism, and it's an underwriting rule rather than a contract term, so no drafting on your side changes it. The appraiser's opinion of market rent is what sets the baseline, and the credit that can be recognized as borrower funds is generally the difference between contract rent and that market rent, supported by canceled checks or bank debits showing the full payment actually cleared each month. Programs differ on the lookback window and on how much documentation they want, so get your buyer's loan officer to put the program's requirement in writing before she pays for another appraisal.

The other $8,700 doesn't vanish. It just changes category. Applied as a reduction in the purchase price, it lowers her loan amount instead of counting as cash she brought, which is fine as long as the numbers still work. Where that breaks is the strike price. Loan sizing runs off the lower of contract price or appraised value, so if the house now appraises at $255,000 against your $265,000 strike, the credit stops being the problem and the $10,000 gap becomes the problem. Order a rough value opinion now rather than finding out at week three of a 45-day escrow.

On the option fee, treatment varies by lender and program, and an amount that was never segregated is harder to trace. If it went into operating cash it may still work as a documented price credit at closing on the settlement statement, which is a different thing from counting as her down payment. Confirm the specific treatment with the lender in writing.

One more thing worth checking before you spend effort on any of this: whether her payment history over 30 months is actually clean. Underwriters read the ledger.

wendy_park48 · Answer

Pull the lease and find the forfeiture clause before you argue with the loan officer. The ones I've read make the monthly credit conditional on payment being received by a specific day, usually the first or the fifth, with no grace period, and any late month is credited at zero. If her ledger has four late months in 30, your own contract says the credit is $9,100 and not $10,500, and now you're the party with the arithmetic problem in front of an underwriter who is already suspicious. Also check whether the credit clause sits in the lease or in the option agreement, because the settlement statement has to match whichever document you hand the title company.

My tenant-buyer's lender is refusing to count $10,500 of rent credit

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