Home Partners of America and New Penn Financial have joined forces to offer renters the ability to get a mortgage with as little as their security deposit.
The joint venture aims to alleviate one of the main obstacles to owning a home, the down payment.
It’s not the first time we’ve seen this in recent history, with HomeFundMe launching a crowdfunded mortgage down payment just last month.
But this new program brings together a rent-to-own company with a mortgage lender to bridge the financing gap.
The Ownership Conversion Pilot: Rent-to-Own with a Twist
The so-called “Ownership Conversion Pilot” has the same objective as others that came before it, but it’ll work a little differently.
First, an approved applicant works with a licensed real estate agent to find a home that meets Home Partners’ criteria, then the company purchases the property on their behalf.
Home Partners of America currently buy homes in more than 50 markets nationwide, including places like Portland, Oregon and Stockton, California.
Once the home is purchased, it is then leased to the applicant in a typical rent-to-own scenario, whereby the renter is given an option to buy the property in the future.
There are both pre-determined rents and pre-determined right-to-purchase prices for a defined period of three to five years.
However, the property only needs to be leased for a period of one year, with additional one-year term extensions permitted.
Once the renter has demonstrated the ability to make on-time rental payments for a period of 24 consecutive months, and has completed home ownership education or counseling courses, they can apply for a mortgage to purchase the home.
Both current and new residents in the Home Partners’ Lease Purchase program are able to participate in the Ownership Conversion Pilot.
In fact, current residents of Home Partners’ properties who have already met the 24-month timely payment and housing counseling/education requirements could be eligible for the pilot immediately.
New Penn Financial Will Provide the Mortgages
What separates it from other rent-to-own programs, and its old format, is that a mortgage lender has joined up to fill in the financing gap. This provides more assurances (but not a guarantee) that a renter can actually make the transition from renter to homeowner successfully.
As noted, New Penn Financial will be that lender, and as long as the borrower meets Fannie Mae’s eligibility requirements, such as having a 620 FICO score and being able to verify income/employment, they can eventually finance their rent-to-own home.
The companies even pointed out that applicants could qualify for a mortgage using as little as their rental security deposit, which could be used as a down payment and/or toward closing costs.
While it might sound risky, they argue that the rental period gives residents time to prepare for homeownership, pay down other debt like student loans, and save for closing costs.
The renter may also be able to benefit from any home price appreciation when it comes time to buy the property, though again, no guarantee there if property values don’t keep rising.
I dig some digging and it appears that Home Partners of America increases the right-to-purchase price each year by 3.5%-5%, depending on the region. If the property increases at a faster clip, it might be possible to use that appreciation to help qualify for a mortgage.
For example, it might be considered equity, thereby reducing the required down payment the borrower would typically need to make. This isn’t spelled out anywhere, so I’m just guessing.
Of course, the option to buy in the future means the monthly rent might be a bit higher than it would be on a straight up rental. One also has to consider the starting price of the home and its eventual buyout price relative to other homes.
The mortgage info is a bit sparse, but I’m assuming the mortgage will be a low-down payment offering via Fannie Mae’s 97% LTV program.
In summary, this latest move follows the current trend of real estate companies buddying up with mortgage lenders as the origination mix shifts toward purchase applications.
The Mortgage Bankers Association reported this morning that refinance applications fell to their lowest level since January, while purchase apps enjoyed an uptick to the highest level since September.
And next year, the refinance share of applications is expected to fall to its lowest point since 1990. This explains the recent scramble to partner up with companies who have buyers ready to take the plunge.
The companies are referring to this as a “test and learn opportunity, so the pilot will only be available until late 2019.
Read more: Rent vs. buy a home.