Not all potential homebuyers have the ability to purchase a home. Whether you do not have a large enough down payment or you do not qualify for a mortgage program, it can often leave you with renting as your only option. The good news is that you do have the option to lease purchase a home. This works a little differently than a standard purchase, but it can help you become the homeowner you always wanted to be without struggle.
What is a Lease Purchase?
A lease purchase is a different type of agreement between you and the seller. It starts as a lease, as you would normally see when you rent a home. However, in the contract is specific wording that notates the purchase price you and the seller agree to as well as the other terms that surround the contract. Every seller has different requirements, but in general, the contract will state:
- The purchase price
- The specified rental period
- The specified rental amount
- Any upfront deposits the seller/landlord requires in exchange for holding the house off of the market for the specified period
- Any amount of the monthly rent that the seller will credit towards the price of the home
What Happens to the Extra Money if You Do Not Purchase?
Every seller/landlord has different rules. For example, one person might require that you pay a higher than average rent for the home in exchange for the right to purchase it down the road. Because the seller must keep the home off of the market for the agreed upon time period, they sometimes need to make up the difference with premium rent. That money that you pay goes towards the price of the home or even the closing costs. In the event that you decide not to purchase the home because you no longer want either the home or you cannot secure financing, you forfeit the extra money paid to the seller. They receive this compensation for not selling the home to someone else during the time that you rented.
How You Benefit
As a buyer, you benefit from a lease purchase in several ways:
- You get to lock in a potentially lower sales price for the home. This is especially important if the market is hot and housing prices continually increase. If you are not quite ready to purchase, but you know you want to purchase the home you intend to rent, you can lock the price in now while you save for the down payment and closing costs for a future purchase date.
- You get more time to save money for the down payment and closing costs. Typically, the more money you have to put down, the more favorable financing terms you can obtain. If you are able to save 20% or more, you can even avoid paying Private Mortgage Insurance. If you do not have any money saved, this is a great way to secure your home while saving money to purchase it down the road.
- If the prices in your area go down before you exercise your right to purchase the home, you have the right to negotiate your sales price. Not every seller will be willing to lower the price since they kept the home off of the market for you, but you do have some leeway if prices plummet significantly.
What You Should Do
Before you decide to lease purchase a home, you need to have the right people in your corner. You should never enter a contract without a professional opinion. In general, a knowledgeable real estate agent and real estate attorney are necessary for a smooth process. They can both oversee the contract, make sure you are not paying too much of a premium and that you have proper protection against any type of issues down the road whether you decide to back out or if the market changes drastically.
In addition, you should have someone perform a title search on the home to make sure there are no liens on the home except the current mortgage the seller holds. If the home is in foreclosure or the seller is underwater on the mortgage, you will know from the title search and can make an informed decision from there.
Securing Financing for a Lease Purchase
In order for you to successfully complete a lease purchase, you need adequate financing. Early on in the rental period, you should start talking with a lender to see what you need to do to secure an approval. The lender can tell you if:
- Your credit score is not high enough
- You have too much outstanding debt
- Your income is not stable enough
Once you know what you need to work on, you have time to fix the issues during the rental period allowed on the contract.
There are many different loan programs out there that enable you to secure funding for a lease purchase. Because you have a little more time than someone that needs financing fast when the market is hot, you have the option to shop around. Make sure the financing you find is beneficial to you or continue to shop around until you find a program most suitable for you. In the end, both the seller and yourself win with the option to purchase a rental, giving you many options to reach your home ownership goals.
