April 17, 2024
    A lease purchase can give you the option to buy a home before the lease expires. Here is everything you need to know about this type of agreement.

    A Brief Guide to Lease Purchase

    Owning a home has always been part of the American dream. However, everyone doesn’t have the means to purchase a home the traditional way—which is why lease purchase options have become so commonplace. There’s no better way to become a homeowner than to move into a property and ease your way towards ownership.

    If you’re unfamiliar with the lease purchase process, this guide has the answers. Take a look at the information below to learn more about lease purchase homes and their benefits.

    What Is a Lease Option?

    A rent-to-own house or “lease option” is an arrangement containing both a lease and a buying agreement. Renting to own requires a particular amount of time that you must make rental payments. Then, you will have the option to purchase the home at the close of the leasing term, potentially using some of the monthly payments as a down payment.

    You and the landlord will set the housing price for the property upfront, and you’ll finish the purchase at a later date if all goes as expected. The seller typically requires a large option fee that’s well above the rental rate in exchange for allowing you to purchase a future home based on current property prices.

    The Details Included in a Lease Option

    Here are the primary components of a lease option agreement:

    Purchase Price: What you’re going to pay for the property at a later date

    Term: The number of months that the deal will be in place, which is generally 1-3 years

    Option Fee: The initial charge that you pay when you make the transaction. This eventually becomes part of your down payment 

    Leasing Credit: The above-market rent paid to the lender that goes towards a portion of the down payment if you purchase the home. The portion is usually 10-15 percent over the market rent prices.

    What Is a Lease Purchase?

    A lease purchase is another variant of a lease option. The buyer pays option payments to the seller for the right to purchase the home later. They’ll also negotiate a selling price,  which is usually at or marginally higher than the actual market value. The buyer agrees to lease the house from the landlord for a fixed rental price over the duration of the option.

    The purchaser applies for bank credit and at the end of the agreement, pays the seller in full. Although the option money does not necessarily go towards the down payment, a percentage of the monthly lease payments apply toward the selling price.

    Option cash is nonrefundable. No one else can purchase the home unless the buyer relapses on payments.  Furthermore, the buyer usually can’t assign the lease purchase agreement without the consent of the seller.

    Leasers are also responsible for maintaining the home and paying for the costs related to its maintenance over the term of the contract. Those expenses include taxes and insurance, and they are contractually obligated to purchase the house.

    The Benefits of Lease Purchase Homes for Buyers and Sellers

    Lease buying contracts are typically offered by owners of hard-to-sale homes. They sell them to a traditional purchaser who would give the seller cash if the property is easy to sell. In general, sellers get market value at current rates and relinquish the burden of coming out of pocket for the monthly mortgage on a vacant house.

    While the mortgage costs surpass market rent, in some situations the homeowner creates a down payment and hopes that the house will appreciate above the sales price negotiated. Buyers usually pay a modest down payment with little to no qualifications, making it an enticing way to take advantage of homeownership through a lease purchase.

    Once a portion of the leasing cost is applied towards the selling price at the conclusion of the lease option agreement, purchasers enter into a mandated savings plan. If the borrower defaults, no part of the rental payments or option money is refunded by the seller. Plus, the sellers have the right to sue for past due payments.

    Is a Lease Purchase Option a Good Idea?

    Going into a lease purchase agreement isn’t for everyone. If you’re contemplating whether or not it’s a good idea for you, here’s who it’s generally recommended for:

    • Potential purchasers with poorer credit ratings or less cash for a down payment
    • Potential buyers that are not a good match for first-time home buyer programs
    • Buyers who, due to economic or job-related uncertainty, may be hesitant to completely commit to upfront expenses
    • Sellers who may have trouble selling because of the competition 
    • Sellers who are in preforeclosure
    • Sellers who intend to continue to gain rental income for a short-term period before inevitably withdrawing themselves from the property

    There are many pros and cons to rent to own homes. Click the highlighted link to get more details on the advantages and disadvantages of renting to own.

    Take Advantage of a Lease Purchase Agreement

    As you can see, lease purchase homes are a huge benefit for those who struggle to buy a house the traditional way. Sure, you’ll have to pay more in rental costs, but it’s a great way to take your time with becoming a homeowner.

    If you’re in the process of building your credit or if you don’t have a large lump sum for a down payment, lease purchase agreements are your best bet.  When homeownership is your ultimate goal, there’s absolutely nothing wrong with taking the rent to own route. 

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