How does a Lease/Purchase work? This is a popular question and the answer may interest you.
First, notice the term: Lease/Purchase. The two words almost joined is a good visual
of how the contract works.
1. The Lease/Purchase
contract allows you to provide evidence of your ability to pay the mortgage. This is especially helpful if you need help in
qualifying for a mortgage. Some examples of not qualifying for a mortgage may be:
a. If you have had credit problems in the past.
b. If you have a shared debt with another
person on your credit report.
c.
If you own your own business for less than 2 years.
d.
If you have a higher debt to income ratio.
e.
If you are just starting out and have no credit history.
2. The Lease/Purchase allows you to use the payment history of the contract term as evidence of your ability
to pay. Many mortgage lenders have programs which consider this in your mortgage application.
3. The down payment is normally applied toward your
down payment upon closing of the purchase loan, instead of a standard deposit on a straight lease. The benefit is: your money
is applied toward your investment in your new home. The risk is: If you decide not to purchase, the down payment is non-refundable.
4. How much down payment is required? This is a negotiable
item. Some owners are willing to accept $1000.00 and some owners may require a percentage of the purchase price or specify
a minimum amount. Although the requirements vary, many owners accept 5% as a down payment.
5. The Lease/Purchase payment usually has an amount specified
to be credited toward your down payment at closing. This is also a negotiable item. The benefit: your rent dollars contribute
to your down payment and work like a savings- you are not wasting money on rent. Depending on the lender, amount down, the
lease payment, and your negotiated portion allocated toward down payment, you may not need an additional deposit upon
closing. You may be able to construct your Lease/Purchase contract to assist you in achieving this goal. It would be wise
to consult with a mortgage lender to help you set a goal for your down payment needed. The risk: You will not receive the
monthly allocated dollars if you decide not to purchase, not any different that standard rent.
6. The Lease/Purchase Price: An important negotiable
item. The Benefit: the purchase price is usually specified in your Lease/Purchase contract, which allows you to gain the increase
in property value upon purchase. Although markets and time frames vary, 3% per year is a commonly used estimate of increase
in property value. The agreed purchase price allows you to plan for your mortgage with a guaranteed price while building equity
in your ownership. This is one of the main reasons for buying your own home. Equity becomes a valuable financial tool for
your future financial needs. The Risk: Although very rare, if the property were to decrease in value, the owner would not
be obligated to reduce the agreed upon price when you are ready to purchase.
