Can my rent to own equity be used as a downpayment?
The home owner will knock 20% off the price of the house. If the house is worth $297K, then 20% is just a discount your landlord is offering.  So your actual purchase price is $237K, and therefore a bank would have to lend you $237K. Since the house is worth more than the loan, you have equity.  20% to be more accurate.  Another way to say is, the bank only wants to loan you 80% of the value of the item securing the loan. If you default on day one, they can sell the house to somebody else for $296K and get a 20% return on their loan. So this 20% you are worried about isn't actually money that anybody gives anybody else, it is just a concept. I think you need to go to a local bank and ask. The key thing is paper trail. For any mortgage I've gotten on a new purchase, the bank needs to see where the down payment came from and how it got to the seller. In this case, it can go either way. If the value is truly 100% to the 80% you are looking to finance, and the paper trail is legit, this may work just fine.  The issue others seem to have is that simply buying at a 20% discount is not a legit way to finance the 80%. Here, it appears to me that the 20% came from you in installments, via the rent. I do not think the bank would consider the 52K as equity.   Typically, a rent-to-own lease is technically a lease-option contract where you lease for a fixed amount and at some point during the lease you have the option to buy it at a discounted price.   I think the bank would consider it a negotiated price.   I know that those down payment assistance plans are considered price negotiation by the IRS for the purpose of basis cost and I suspect this would be similar where your basis is $236,800 and not $296,000.
Buying a property and renting it out can be a good investment if it matches your long term goals.  Buying an investment property is a long term investment.  A large chunk of your money will be tied up with the property and difficult to access.  If you put your money into dividend producing stocks you can always sell the stock and have your money back in a matter of days this is not so with a property. (But you can always do a Home equity line of credit (HELOC)) I would also like to point out landlording is not a passive endeavor as JohnFx stated dealing with a tenant can be a lot of work.  This is not work you necessarily have to deal with, it is possible to contract with a property management company that would place tenants and take care of those late night calls.  Property management companies often charge 10% of your monthly rent and will eat a large portion of your profits.  It could be worth the time and headache of tenant relations.  You should build property management into you expenses anyway in case you decide to go that route in the future. There are good things about owning an investment property.  It can produce returns in a couple of ways. If you choose this route it can be lucrative but be sure to do your homework.  You must know the area you are investing very well.  Know the rent, and vacancy rates for Single family homes, look at multifamily homes as a way of mitigating risk(if one unit is vacant the others are still paying). The price of the loan may be justified if you're considered a high-risk applicant for some reason (e.g. you're putting very little money in initial payment), and if it includes all the associated expenses. What is more relevant to your situation is that you're probably better off renting. Think about it: your $300'000 house will require some repairs in those 30 years (let's estimate those at $100'000). That means in 30 years you'll build $200'000 of equity spending $720'000 on it. Of course this assumes that the value of the house will remain constant. You're effectively be throwing away $520'000, or more than $1'400 a month. If you can rent a place for $1'400 a month or less, you'll build more equity by renting that place for 30 years and saving the excess money in a bank account. If you consider the interest that money in your bank account will earn you (e.g. 3% annually), you'll build more than $200'000 equity in 30 years even if you spend as much as $1'650 on your rent and save only $350 a month. "Depending on where you live in the UK, buying a house sooner might be a better option. I would echo the advice about putting some money away into a ""rainy day"" fund etc. above but I know that in my area house prices are going up by around 7% per year. I bought a house two years ago and I'm paying 4% interest on my mortgage so I'm effectively making money by owning my house.  Given that you want to buy a house soonish, if your money sits in an account somewhere making no interest, you're effectively losing 7% of your cash each year by not keeping up with house prices, meaning you'll be able to afford a smaller house with the same money. Do bear in mind though that buying a house costs around £4k in lawyers fees, surveys, mortgage setup fees etc. and selling a house can be more since estate agents will take a % of the sale cost. If you live somewhere where house prices are not increasing as quickly then this will not be as good an option than if you live in e.g. London where house prices are currently skyrocketing. If you don't want to live in the house, you may be able to do a buy-to-let as an investment. Generally the rent will cover the mortgage payments and probably a letting agent/property management company's fees, so while you won't see any actual net income, the people renting will be paying the mortgage off and you'll be building equity on the home. It's not entirely without risk though as tenants can trash homes etc." What you are suggesting will not work. Banks have strict guidelines about what they can and cannot do with an FHA loan property. Remember the FHA is only an insurance policy to the bank saying that if you default they will cover a high percentage of the loan.  The bank won't take the risk of violating their insurance policy and the government refusing to pay them off if you default. Instead, consider doing a creative sale on your property, maybe a rent to own deal or owner financing. As long as you pay the mortgage the bank won't even know you don't live there and you can rent the house out to someone who eventually will buy it after the timeframe expires. Meanwhile you can go and get a new home or condo either thru regular financing or owner financing(search the internet to see how to do this) and you can use owner financing until you complete the sale of the first house. Otherwise just tough it out in the house you are in until the time expires and then sell. You made no mention of the property value but I am assuming if you bought it 3 years ago that you may have a little equity. Pleas note that if you sell at that time though you will likely have to come out of cash because your equity won't cover the realtor fee and closing cost. But if you do the rent to own I suggested earlier you can sell at a slightly higher price making sure you can cover those cost. I realize this answer is a little out the box but I deal with people who don't want properties all day and I have completed transactions like this many times. Good Luck and God Bless! The issue here is that the transaction (your funds to her account) looks very similar to the rent payments which you plan to make in the future. Those rental payments (if deemed to be commercial) would normally be subject to tax. Consider the scenario where rather than an up front $5000, and $5000 over 2 years, you paid her $10000, and paid no rent. That might be an attempt to avoid paying tax. A commercial transaction can't be re-labeled as a gift just based on your election - the transaction needs to be considered as a whole. However, an interest free, unsecured loan connected with you paying rent at market rate would be (depending on local laws) simply foolish (to some extent). I don't think you are able to structure the transaction as a joint purchase (since the mortgage will prevent her from allocating a part of the property to you). Its also likely that you can live in her house and contribute an adequate amount to the household costs without creating a taxable income for her. For example in the UK, up to ~£4000 pa rental income generated from the property in which you reside does not need to be declared. You need to identify the scenarios where your particular arrangement could be imagined as resulting in a taxable or potentially taxable event - then make sure you are not avoiding those events just by choosing how you label the events. "It would have to be made as a ""gift"", and then the return would be a ""gift"" back to you, because you're not allowed to use a loan for a down payment. This is not to evade taxes.  This is to evade a credit check.  The problem is that banks don't like people to have too much debt.  The bank could void the loan and go after your friends for damages under certain circumstances, as this is a fraud on the bank.  Perhaps you might be guilty of conspiracy to commit fraud or similar.   I'm willing to assume for the sake of argument that there is zero chance of your friend not paying you back intentionally.  But even so, there are still potential problems.  What if your friends end up without the money to pay?  Worse, what if something happens to them?  This is an off-books transaction.  You couldn't make a claim against the estate, as there can't be a paper trail.  You'd be left out the money in those circumstances.   You'd both be safer if your friends saved up for the next opportunity rather than trying to grab this one.   An alternative would be to buy a share of their current rental house.  That would give them the necessary money and would give you paper showing your money.  It's not a gift, it's a purchase.  You'd have to pay capital gains tax on the 15% profit that they're promising you.  But you'd both be above board and honest." Renting your property out at less than market rates is a form of charity. Your heart says that this is the right thing to do, your bank account says no. And so does your wife. This isn't a question for the Money stack exchange, I think ... But since you are asking here: "Check to see if you can do this at this point. When I was refinancing the mortgage on my last house, I put a sizable ""extra"" chunk down like you're planning to do, but the amount of the loan had already gone through the processing (for lack of a more specific term).  My extra money went toward principal, but my payment was still the same as if I hadn't put any extra down. If you find out that it's too far along in the process, not to worry: extra emergency fund isn't a bad thing to have."