FHA Lease/Option – Earned Equity Program (EEP)

Program Type: Proprietary FHA-Affiliated Lease-Option Program
Program Code: FHA-EEP-LO
Purpose: Transitional path to FHA homeownership through structured lease-option with earned equity credits.

Program Overview

The FHA Lease/Option Earned Equity Program (EEP) enables qualified tenants to transition into homeownership by leasing a property while accumulating “earned equity credits” through on-time payments.
At lease expiration (12–36 months), the tenant exercises a purchase option and applies accumulated EEP credits toward the minimum required investment and closing costs on an FHA-insured loan.

EEP credits are treated as verified borrower assets, subject to FHA Handbook 4000.1 requirements and documentation standards.

Program Purpose

This program is designed to:

• Bridge the gap for renters lacking sufficient savings for FHA down payment and closing costs.
• Establish consistent housing payment history to improve borrower creditworthiness.
• Promote neighborhood stabilization by converting tenants into long-term homeowners.

EEP is not an FHA program itself; it’s a lender-originated pathway structured to remain FHA-compliant at purchase.

Eligible Participants

• Borrower:
  • U.S. Citizen or Permanent Resident Alien.
  • Must intend to occupy as primary residence.
  • Minimum credit score 620.
  • No major mortgage default in the past 36 months.
  • Must complete HUD-approved Homebuyer Education prior to closing.
• Seller/Lessor:
  • Must hold clear title.
  • Cannot be the originating lender or related party to lender.
  • Must maintain property in FHA-insurable condition throughout lease term.

Property Eligibility

• 1-Unit primary residence (SFR, townhouse, FHA-warrantable condo).
• Manufactured homes allowed if FHA-eligible and on permanent foundation.
• Appraisal required prior to lease execution or updated within 120 days before closing.
• Must meet FHA minimum property standards and HUD Handbook 4000.1 requirements.

Program Structure

5.1 Lease Term

• Minimum: 12 months
• Maximum: 36 months
• Lease and Option agreements must be executed concurrently.
• Lease payments must be made in full and on time to earn EEP credit.

5.2 Earned Equity Credits

• Credits accrue monthly, typically $200–$600, or 1–2% of base rent.
• Accrued credits are non-refundable if the tenant fails to exercise the option or defaults under the lease.
• Credits vest only for on-time payments (15-day grace allowed).
• Accrued EEP credits may be used as:
  • Borrower’s minimum required investment (MRI);
  • Closing cost credit; or
  • Combination of both, subject to FHA verification.

5.3 Option Fee

• Tenant may pay a non-refundable Option Fee (1–3% typical).
• 100% of Option Fee may be applied toward down payment if documented and sourced from borrower funds.
• Option fee + EEP credits may satisfy FHA’s 3.5% minimum investment requirement if verified.

Documentation Requirements

1. Executed Lease Agreement with:

   • Payment terms, late policy, and duration.
   • Clause describing EEP credit calculation and vesting conditions.

Option to Purchase Agreement including:

• • • Purchase price (fixed or pre-determined escalation).
    • Term of option and expiration date.
    • Statement of how EEP credits and option fee are applied.

EEP Addendum (Lender Form):

• • • • Monthly accrual schedule.
      • Borrower acknowledgment that credits are not ownership.
      • Statement of forfeiture conditions.

Ledger or Escrow Record:

• • • • • Independent accounting showing rent receipts and monthly credits.
        • Year-to-date and cumulative total of earned equity.

Verification of Payment History:

1. • • • • • 12-month VOR confirming timely rent payments.
           • Cancelled checks or bank statements verifying lease compliance.

             Appraisal and Inspection:

             • Property must meet FHA MPRs at lease inception and again before FHA endorsement.
             • Repairs completed prior to closing.FHA Loan Conversion

At lease expiration or when the option is exercised:

• Borrower applies for an FHA purchase loan.
• EEP credits and option fee are included in Assets Section of 1003 as verified borrower funds.
• Seller credit caps per FHA apply (max 6% toward closing costs).
• LTV determined using original or current appraised value, whichever is lower.
• Appraisal re-certification if >120 days old.
• Must meet all FHA loan eligibility (income, credit, DTI ≤ 56.99%, property, and occupancy).

8. Credit and Income Requirements

• Min FICO: 620
• DTI: 45% standard; up to 50% with AUS approve/eligible.
• Employment/Income: Must be verified per FHA 4000.1 using VOE, pay stubs, or alt-doc (self-employed borrowers: 2 years tax returns or P&L + bank statements).
• Assets: EEP credits verified through escrow ledger, not estimated values.

9. Compliance and Legal Requirements

• Must comply with state Rent-to-Own/Lease-Option statutes (recording, disclosures, notice of option).
• HUD-1/Closing Disclosure at conversion must clearly reflect how EEP funds are applied.
• TILA/RESPA apply only upon mortgage origination.
• Fair Lending/UDAAP: Marketing must avoid misleading claims of ownership prior to closing.

Disclosure Language Example:

“Earned Equity Credits are not ownership and are only applied toward down payment or closing costs at the time of purchase, provided all program terms are met.”

10. Quality Control / Risk Management

• 100% document review pre-funding.
• Verification of payment history from independent escrow or property manager.
• Annual audit of program ledger and statements.
• Fraud red flags: related-party landlord/tenant, inflated credits, non-arm’s-length transactions.

11. Example Transaction

12. Summary of Key FHA Compliance Points

13. Disclosures to Borrower

• EEP Addendum (Mandatory Language):
  “Earned Equity Credits are conditional and apply only at the time of purchase under this program. The tenant does not gain ownership rights until closing. All credits are forfeited if the lease is terminated, payments are delinquent, or the option is not exercised within the term.”
• FHA Notice:
  “This program is not an FHA or HUD product. FHA mortgage insurance eligibility is subject to full FHA approval at time of purchase.”

14. Lender Notes / Implementation

• Establish escrow or ledger system for tracking rent and EEP credits.
• Require homebuyer education certificate prior to final FHA application.
• Conduct property reinspection before issuing FHA case number.
• Use “gift of equity” documentation only if credits originate from seller’s net proceeds.