A lease with an option to purchase, or lease option as they are more commonly called, is a fantastic way for homebuyers to fix credit problems while applying a portion of a monthly lease to a down payment. However, no seller in his right mind is going to offer up a lease option to purchase to a challenged credit borrower without that borrower having some guarantee. Throughout my real estate dealings, I negotiated hundreds of leases with an option to purchase, and can give you 8 insider secrets to getting you down the path to success.
-Talk to a lender
You need to get in touch with a mortgage company and work with a loan officer who isn’t shy about advising you on what it’s going to take for you to get a loan and a timeline to do it. If you are 6 -12 months away from being able to meet the credit requirements, a lease with an option to purchase makes sense. Any longer than that, however, and it’s a waste of money.
-Get a letter from that lender with specifics
Before you present a seller or landlord with a contract containing a lease option to purchase, have your lender write a letter to the seller with the specifics of your situation, and a forecast for when you will qualify for a traditional loan. This ups your negotiating power.
-Negotiate the option fee
Typically, on a lease option is going to come with a minimum 3 percent option fee. This can be a lot of money upfront. However, you are more likely to get that figure down with a detailed letter from a lender, often to the equivalent to first and last months rent. I would be remiss if I didn’t note that the option fee you pay is applied toward your down payment at purchase time, so paying the higher down payment isn’t a grievous thing. However, many buyers need the extra money to pay down excessive debt before a home purchase within the timeline.
Be flexible during negotiations. It’s common for a contract to go back and forth several times before acceptable terms are reached.
-Provide updates once a month, and immediately if things change
If you have a real estate agent, give your agent updates every month on what you have paid and where you stand financially. If not, notify the seller’s real estate agent at the end of every month. Financal changes impact timelines, and being upfront with the seller about it means he is less likely cancel the contract. Excellent communication between all parties is crucial to success.
-Don’t be late on monthly payments
While in the leasing phase, don’t be late on your payments. No matter what.
-Avoid “sweat equity”
Don’t make improvements to the property during the lease term. Improvements increase the value for the appraisal, which also increases your down payment. Wait to make improvements until after you have closed on the loan.
-Don’t buy anything with credit
Don’t buy things on credit, don’t get a new car and don’t open up any accounts during the lease option. Once the loan is closed, feel free to do whatever you’d like.
More from this Contributor:
The 3 Major Home Buying Mistakes to Avoid
Buyer’s Advice: The Facts
First Person: Bad Credit Home Loans and Seller Financing