The new guidelines for obtaining a mortgage are stricter since the real estate crash. A foreclosure will remain on your credit for (7) years making it almost impossible to get another home loan. Even if you currently have late payments, they are easier to overcome because it only factors into your credit score for a few years unlike foreclosures. Charge offs are also a problem and they do stay on your credit for 7 years from the date of default but they are not as bad as a foreclosure. The majority of charge offs can still be negotiated, explained and taken off your credit after it is reported whereas a foreclosure cannot. There are various strategies to satisfy and change most charge offs if you are familiar with the laws that govern credit bureaus and collection agencies. The bottom line is you should try to salvage your credit if possible.
A lease purchase allows you to avoid foreclosure by having someone take over your mortgage payments and pay the back monies owed to the lender.
If you are behind in your mortgage payments or facing foreclosure before you walk away from your property and allow it to go into foreclosure you should explore alternative solutions like a lease purchase. Many people feel if they are unable to remain in their home there is no point in trying to save their property from foreclosure. However, it is in your best interest to try to mitigate your financial situation particularly if you want to buy another house in the near future.
What Is A Lease Purchase
A Brief Overview Of How It Works
Lease Purchase - An Alternative To Foreclosure
Here's how a lease-purchase (also called rent to own) typically works: The tenant/buyer (called an optionee) leases the property from the seller (called an optionor) for a period of time. The lease contract gives the optionee the right to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the contract. The optionee pays a sum, called option money, to the seller at the onset of the lease. This money is applied to the purchase price if the option is exercised.
A lease purchase is very similar to owner financing with the main difference being when you sell a property using a lease purchase (which is considered a form of financing) the potential buyer (tenant) will lease the property for a short period of time, usually 12-24 months. Once the lease term has ended the buyer (tenant) must obtain a mortgage to purchase the property from the seller. With owner financing, the seller usually acts as the bank and there is no lease period.
The next important factor is placing the right buyer/tenant in the property. Many people are looking to lease purchase due to the stricter requirements involved with obtaining a mortgage but all are not what we consider a good candidate. Prior to approving a buyer/tenant our preferred mortgage broker will need to analyze their credit and income to determine if they will be able to secure a mortgage within the timeframe stated in the lease purchase contract. We select buyer/tenants who only have a few blemishes on their credit report that need to be corrected. They must also meet the income requirements for the property’s purchase price. Once the mortgage broker decides the buyer/tenant is a good candidate, they are then provided with a checklist of the necessary steps they must take to obtain a mortgage. Our mortgage broker will also assist and monitor their situation to make sure they are working towards clearing up the issues that is preventing them from getting a mortgage. This is a very important step but is often overlooked when executing a lease purchase.
We also already have a database of potential buyer/tenants that have already been pre-approved for a lease purchase. Because time is a factor of course, we will attempt to match these potential buyer/tenants with your property in addition to listing it on the MLS and 50 other online real estate websites for maximum exposure.
The Lease Period
During the lease period of the contract, we manage your property in the same manner as a traditional rental property. The buyer/tenant will contact us regarding any issues they may have. We also collect the rent (which must be paid directly to the mortgage company). Most lease purchase contracts make the buyer/tenant responsible for repairs and maintenance however, this can be determined by the owner. If the homeowner chooses this option, we will include certain stipulations in the contract making the buyer/tenant financially responsible for any damage they have caused if they do not exercise the option to buy the property at the end of the lease period. We also require buyer/tenants to report any maintenance issues as they occur along with agreeing to mandatory inspections. The number of inspections will be based on the time length of the lease.
Buying The Property/Closing
Several months before the lease period comes to an end our mortgage broker will work with the buyer/tenant to get them approved for a mortgage loan. We then have the buyer/tenant and the seller sign a new purchase agreement that is traditionally used when buying a property. The purchase agreement will cover the standard issues such as closing cost, if the property is sold “as-is”, the closing attorney, the closing date, the purchase amount, etc. We also assist the seller with the entire transaction.
Typically, our commission/fees are deducted from the option money/down payment however, if you owe back payments to your lender as discussed earlier, the money will go to pay off that amount. Usually depending on the property some owners will receive, a portion of the option money/down payment after the commission/fee is paid but under these circumstances, you may not receive any monies. Any remaining amount left after the back payments are satisfied is what we receive, which is less than the standard commission/fees we normally would get because the majority (if not all) of the money usually goes to the arrears. Weather you will get any money from the down payment really depends on how much you owe in back payments and the property itself. If no money is leftover from the down payment, we usually have the owner allow us to manage the property during the lease period and we will receive a standard property management fee, which is calculated into the monthly rental payments that the buyer/tenant pays.
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Not every situation will fit a lease purchase so it not only depends on the property but your circumstances as well. Some owners are already in pre-foreclosure and time is a huge factor while others are behind in payments and not yet in foreclosure. Both situations require a few adjustments to the typical way a lease purchase is structured, like the option money/down payment amount, which is applied to any monies that is in arrears. We usually also recommend a 24 month lease period because this is how long late payments will affect your credit. Having on time payments will help to increase your credit score and reestablish a good payment history. This is not a requirement but it is important when applying for another mortgage loan. Lenders will pay particular attention to your previous mortgage history. Once we know your situation, we will be able to determine what the best course of action is and discuss all of your potential options.
Not In Foreclosure Or Behind In Payments, Click Here
For a lease purchase to have a successful outcome it has to be done properly and the property must meet certain requirements. In order to find out if your property is a viable candidate for a lease purchase, we must first view the property and perform a market analysis. If we decide your property can be lease purchased, we then determine how the contract should be structured. If your property is not a lease purchase candidate, other solutions may fit your situation.