A Lease Puchase Contract
This is probably the 2nd most powerful idea in mortgage lending. When you understand the potential power of a lease purchase contract, your context will be changed forever.
You don't hear a lot about lease purchase contracts for one reason, money. Banks, Brokers and Real Estate agents don't make any money when you enter into a lease purchase. You don't have to get a mortgage to use a lease purchase. And, since you aren't using that mortgage to pay off the seller, there's no money to pay real estate commissions. A lease purchase is a favorite tool of investors, but not Lenders and RE agents.
Do some research on this topic. The internet or your local library should have plenty of information. Look for lease purchase and lease option. To a lender they are essentially the same.
Think of a lease purchase as rent to own. You enter into a rental agreement, lease, with the intent or option to purchase that home at a later date. Usually, a small or modest downpayment is required. Also, the price at which you will buy the home in the future is established in the contract.
One advantage is that you can stay in the home for a year or two and decide if the home and neighborhood is where you really want to live. This by itself is very helpful, especially if you have just moved into the area.
However, the real power of a lease purchase is much more interesting. In most states, a lease purchase is regarded as a purchase contract. Once you have seasoned that contract, usually a 12 month period, its viewed as if you are already buying that house.
Here's what that means to you. After you have seasoned your lease purchase, go apply for a mortgage loan. Explain to your loan officer what you have done. Your loan officer can then treat your purchase as a refinance using the appraised value of your home. If you have purchased intelligently, your appraised value will be higher than the purchase price stated in your contract. Your LTV will be calculated on your appraised value, meaning you need to borrow a lower percentage of the value to meet the purchase price. Remember, the lower percentage the lender has to give you, the more they like you.
Please, do your own research and seek legal advice before entering into any contract. This is a very basic explanation of the concept. A lease purchase contract can be written almost any way you and the seller agree upon.
For example, it can be written more as a lease in which the seller, acting as landlord, is responsible for repairs to the home. Or, it can be written the exact opposite, where you act more as a home buyer and are responsible for the repairs.
Two Things to Remember
Lease purchase contracts are great if done correctly. I strongly advise you to research your own state's laws on this topic and always, always, always make your payments by check.
Let me repeat. Make your lease purchase payments by check! Do not use money orders and certainly do not use cash. The reason is simple. You need a verifiable paper trail to prove you've made those payments on time. Cancelled checks are the most convenient and easily verifiable proof you can use.
You can't count on your lender taking your landlord's word that you always pay on time. He's an interested party. Its in his best interest for you to get the loan.
