A Lease Option purchase is an agreement entered into between a buyer and a seller where the buyer leases the property for a pre-determined amount of time, usually twelve months.
At the end of the lease term, the buyer has the opportunity to purchase the home at a preset price.
If 12 months have elapsed between the lease option start & the purchase date, many lenders will treat this transaction as a refinance since the buyer has a vested interest in the property.
Since the transaction will be treated as a refinance, you man be able to finance your closing costs and receive cash back at closing.
To protect yourself against the property being sold prior to the purchase date, make sure you record the lease option agreement at your county clerks office.
When the lender treats this transaction as a refinance, they want to see the house payment history. It is very important to make the house payments on time. Also, the borrower must keep records of the payment. The best way to keep track the payment is to make the payment using hand written checks, and to keep the copies of the "cancelled" checks in order to provide them upon the lender's request. The lender doesn't like to see either receipt of money order or cash since it is difficult to tell whether the borrower made the payments on time.
As a potential borrower you may be charged an upfront non refundable fee to enter into a Lease Option. This fee sometimes does not apply to the final purchase price of the home. Always be sure to read and fully understand any lease option purchase agreement you sign.
When entering into a lease option agreement, it is best to speak with a mortgage broker about getting pre-approved for a mortgage. A mortgage broker can identify any potential obstacles standing in the way of you being approved for financing and tell you how to fix them.
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When doing lease options it is a good idea to make the lease convertible. By doing so if the tenant/borrower is unable to get conventional financing later, the lease can retroactively be converted to a mortgage then sold on the secondary market as seasoned.
This eliminates the worry and guarantees the financing later.
The benefits for a home buyer to purchase a new home through lease options might come in the form of simple credit qualifications. Also, most lease options require small down payment requirements. Another benefit would allow a buyer to lock into a low purchase price.