Buyers have a lot to lose if they cancel deal
The option fee and rent premium are not part of the down payment unless the seller agrees to relinquish the right to retain these payments in the event the buyer doesn't exercise the option. Few sellers would be willing to do that. But the option fee and rent payments do make the required down payment slightly smaller.
For example, the parties agree to a price of $100,000 and the option fee and rent premium add to $5,000 when the option is exercised. From the standpoint of the lender, the price is $95,000 and a 5 percent down payment requirement would call for a down payment of $4,750 instead of $5,000.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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