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How Does A Rent Back Work; Owner Occupancy Rules

How Does A Rent Back Work; Owner Occupancy RulesWhat Is Needed for a Rent Back Agreement

In the fast-moving world of real estate, oftentimes, homebuyers find that the timing doesn’t always align with moving schedules. Oftentimes the sellers may still be trying to find their dream home or might not be ready to move just quite yet. With the option of rent back (or lease back) agreements, this doesn’t have to be a concern for sellers worried about the timing of their home sale.

What Is A Rent Back Agreement?

In a real estate transaction, the home being purchased is oftentimes still occupied by the current property owners. However, once a purchase agreement has been solidified, sometimes the timing isn’t quite in line with both parties, and the current occupants will need a little extra time to find their new home. In cases like these, a rent back, or lease agreement is useful. This allows the sellers to remain in their home for a set period of time and “rent” the home from the new owners.

How Do Rent Back Agreements Work?

Most commonly, the real estate agents working with the buyers and sellers will work to create a lease agreement that covers the duration of the rent back (there are limits!),the rental rate, a security deposit, homeowners insurance, as well as a clear outline of responsibilities for the property during this rent back period.

Nearly all loans require a 60 day occupancy after closing. This is the maximum rent back period. We often tell Realtors and buyers, however, to limit the rent back to 59 days to ensure that the new buyers are able to move into the property by day 60. This is to avoid a potential breach of the owner-occupancy agreement rules.

One thing to note for sellers though is that the rental rate may be higher than their former monthly mortgage payments; however, since it is only a short time frame, this should not deter from the rent back process.

Fannie Mae and Freddie Mac Rent Back Guidelines

Fannie Mae and Freddie Mac rent back guidelines require buyers to move into a financed property within 60 days of close of escrow to meet owner-occupancy requirements.

FHA Loan Rent Back Guidelines

The FHA leaseback guidelines require buyers to move into a financed property within 60 days of close of escrow to meet owner-occupancy requirements.

As a reminder, FHA offers only owner-occupied property financing (FHA offers no investment property financing), and Fannie and Freddie, of course, offer much better terms for owner-occupants because the default risk is much lower.

VA Loan Rent Back Guidelines

Similarly to FHA, Fannie Mae, and Freddie Mac guidelines, VA loans have the same occupancy requirements of 60 days. However, unlike FHA, Fannie Mae, and Freddie Mac, there are some exceptions and flexibility up to 12 months.

The VA recognizes common situations where extensions may be permissible. These can include an active-duty buyer, a service member retiring, repairs or improvements to the property that were pre-determined, as well as intermittent occupancy due to employment requirements. One thing to note is that a spouse can fulfill the occupancy requirement for an active duty service member currently deployed who can not occupy the home in what the VA deems a “reasonable time.”

Overlays and Exceptions

Some mortgage lenders have “overlays” that limit a rent back to only 30 days, and many jumbo lenders have 30-day limits as part of their hard and fast rules. As a reminder, an “overlay” is an additional requirement or rule that lenders add on top of agency (Fannie and Freddie) or FHA guidelines.

We have no rent back overlays at JVM, of course, but if you are not using JVM for financing, God forbid 😊, seller rent backs should be discussed with the lender before they are included in a purchase contract.

The Bottom Line

Rent backs provide a short-term solution for sellers who are looking to sell their home but have not solidified their next living situation. Typically, these rent back periods can last no more than 60 days, and real estate agents can work with all parties involved to create a lease agreement so that there are legal protections for all parties involved.

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