Have you found your dream home yet? Are you ready to make a purchase but your credit score or savings aren’t quite ready yet? A Lease Purchase approach may be a suitable option to help you move into your dream home while you still can.
What is a Lease Purchase Option?
A lease Purchase refers to a property you can buy through a lease-purchase agreement. With this type of option, you agree with the seller to rent their property for a specific time frame before fully gaining ownership. This time frame generally ranges from several months to years depending on the specifics of the contract in place.
These lease purchase deals are commonly seen in low performing real estate markets where it’s hard for property owners to sell their properties outright. However, they lose appeal in seller’s markets, where it is easier to sell a home. Generally, sellers would go for a lease-purchase option when they have no choice left. When there may be other options on the table, why take on the increased risk associated with a lease-purchase agreement? This may include the tenant not qualified for a mortgage at the end of the lease period or may trash the property and leave the owner in mess.
If you’re looking to improve your credit before getting a mortgage, read through these steps to lease purchase a home.
- Determine if a Lease Purchase option is a good idea for you; A Lease Purchase could be an important homebuying factor but might not be a perfect option for everybody. Study the whole process and ask yourself a few questions before deciding to take on the agreement. Ask questions like:
- Can you afford the option fee?
- Do you intend to stay in the area for long?
- Will you be able to secure financing at the end of the lease term?
- Can you afford monthly payments attached to the lease?
- Do you have what it takes to carry on monthly payments on the home and meet other homeowner expenses during this timeframe?
- Go home shopping: After you must have finalized the decision to take a lease-purchase agreement, the next thing you should do is find a suitable home of your choice where the seller will accept a lease-purchase option. You can either find properties online or by taking a drive around your preferred neighborhood. Sometimes, you might be lucky to see some properties with a rent-to-own yard sign.
- Seek the help of an agent: A real estate agent generally has knowledge of the local market and would have access to lease purchase properties or might know of people who would consider this option. You can find a local real estate agent either on your phonebook or checking online.
- Ask the owner if they’ll accept a lease-purchase option: Not every seller would love to go with the lease-purchase agreement. When you find a home you have interest in, ask the seller if they’ll accept a lease-purchase option. Tip! Go for properties that have spent longer than usual time on the market. This option might motivate the owner and they’ll have to consider it since the property is just there not bringing money.
- Ask the owner why they’re selling: This is to avoid buying a property from a financially distressed person. They might default their loan payments or declare bankruptcy and lose the property in the process. Despite you having a lease-purchase agreement on the property, you’ll be kicked out without any necessary compensations. You can as well go further to do a credit check on the seller. Request their permission to carry out a credit check on them. Search for delinquent accounts or huge debts which are generally signs of bad financial shape.
- Have the Property Appraised: This will help confirm that the home is worth what the seller is asking. Appraisers are generally very affordable and the cost can vary depending on some factors.
- Your location
- Size of property
- Go for home Inspection: Once you found yourself a suitable home and the seller agreed to a lease-purchase option, it’s time to inspect the home and make sure it’s in good shape as stated by the seller. Your agent can as well play a great role here to hire a home inspector to do a full inspection to make known every problem the property may have. In case you find any problems, be sure they’re not issues that could prevent you from getting a loan, and be sure to specify in the contract who’s to take care of problems found during inspection. The sellers might consider offering a discount price to enable the lease-purchase buyer to take care of these repairs.
- Get a Mortgage Broker to assess your credit history: You just might not qualify for a mortgage at the moment. Your credit score is too low you don’t have a stable job. However, you’ll need a mortgage by the end of the lease if you want to buy the house. You need to be made aware of now whether or not you will qualify. Your broker will make it known if there’s anything in your credit history that might stop you from qualifying.
- Negotiate the Terms of the lease option: This generally includes the purchase price, term of the lease, the amount of initial option fee, and the amount of monthly payments that will go towards the purchase price should all be negotiated.
- Pay the Option Fee: After you must have signed the contract? You’ll pay a one-time fee that grants you the opportunity to purchase the home at the end of your lease contract. This is a nonrefundable fee that prevents anyone from purchasing the home during your lease term. The value for these fees generally varies but would total around 1-5% of the home’s agreed upon final sales price. This is similar to the usual down payment you put on a normal purchase process.
- Review the Contract with an Attorney: The contract can either be draft by either you or the seller. You can find sample contracts online to use. If it is to draft the contract, make sure to carefully go through it with the help of an attorney before signing.
- Make your monthly payments on time: When you’re in a lease-purchase agreement, it is important to make your monthly payments on time. A late or failure to make any payments may void your agreement where you will lose any money you already invested in the home.
- Get a Mortgage: When it’s almost the end of your lease agreement and you’re getting ready to gain full ownership of the home; you’ll be required to get a mortgage just like a regular home buyer. Not all mortgages are the same and neither are lenders. Take all the time you have to shop around, you might save thousands of dollars. You need a lender with the best interest rates. When you shop around for a mortgage, be sure to research the lender and not just the prices.
- Close on your Purchase: Now that you have successfully lined up your financing and everything is in place, you can now close on your lease to purchase agreement. Congratulations, you just got your name added to the list of proud homeowners.