Conventional Loan VS. Lease Purchase or Rent to Own

Asked by Marissa, Kansas City, MO Tue Mar 17, 2009

Hi. To make this short, I applied through Countrywide for a home loan and was denied. I was advisd by them to make 12 months of ontime payments and give them a call back, and they should be able to assist-regardless of a lower score. Does anyone know how true this is, or has someone been denied and made consecutive payments to get approved? Also, if I were interested in the lease purchase, or rent to own, are the qualifications the same as getting approved for a conventional loan? Does credit/score play a vital role in this process? Thanks!

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Dale Weir, Agent, Chesterfield, MO
Tue Mar 17, 2009
In the St Louis area, the lease purchase is negotiated twice first as a contract to purchase and at the same time as a contract to lease. Each deal is set differently based on what the buyer and the seller agree to - some have nothing going from the lease toward the purchase, others have a lot going from the lease to the purchase. Most have the security deposit transfer into the earnest money. Typically they are set so if the buyer/renter defaults on any of the monthly rent payments he/she is kicked out right away and the purchase contract is then voided and the security deposit forfeited. The loan commitment and appraisal dates are typically set in the future (a month before the closing date) but the building inspections, title, survey, insurance checks and all other option/contingency type details are done BEFORE the buyer ever moves into the home as a renter so a base line is established. As a renter, the buyer has to take care of the property and the owner has to as a landlord maintain the property. HOmeowner insurance is the owners responsibility but the buyer has to have renters insurance. The terms of the contracts can set the period of the rental for any time period that is agreed to by both sides (3 months, 6 months, a year - very seldom do they go longer than a year), at the end of the rental period the purchase contract is in effect and the buyer is under the legal obligation to buy. Since almost no bank will give a loan preapproval out that far, the agents involved will try to work with a lender they have a good relationship with and have that person guide the buyer through correcting the problems in their credit report, correcting debt issues, etc to be able to get to loan commitment. The seller is taking a real chance with a lease purchase that the buyer is really going to be able to buy at the end of the rental period (the majority of the lease purchase contracts never make it to closing because the buyer still can't get a loan because they still haven't corrected whatever the problems are that they have suppposedly been working on during the lease period), plus the appraisal is done with the loan commitment right before close, and in a down market the seller runs the risk that the home's value will decrease while the buyer is living in the home. They also run the risk that the buyer will tear up the home and they will have to spend money fixing it up again before they can put it back on the market once the buyer has moved out (and issues if they have to evict the buyer/renter because they don't pay the rent). For the buyer there are far fewer risks, but there is always concern that once they are in the home and see the home's normal "warts" they will change their mind. Sellers typically want to see credit scores and a preapproval letter from a mortgage company PLUS they will want to talk to previous landlords, do a background check and a criminal check just like regular apartment rental agencies do.

In a rent to own, you go through a similar situation as I've described above, but you pay a much higher rent payment each month until the home is paid for and you live in it as a tenant until the final payment. The current owner typically is holding the mortgage on a rent to own, and they have the right to ask you all the same questions that a bank asks you.

Taxes and insurance are an issue as well in both these situations and the current owner would continue to hold the title.
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2 votes
Dana Schuster, Agent, Slidell, LA
Tue Mar 17, 2009
With lease purchase you would be paying the owner rather than a lender for a specified time period,,.here are some basics:1. the owner will require a (nonrefundable) deposit,usually 10% of agreed upon purchase price. 2. you will agree to purchase the property within a specified time period,usually 12 mos. will lease the property for this time period at a higher than market value rate 4. The deposit & extra funds will be placed in an escrow account to build upyour down payment. 5. At the end of the lease period you will take this escrow account/down payment & go to a lender to get financing.6. if you do not go through with the purchase,you will forfeit these escrow funds.

if you are considering lease purchase,I urge you to work with a local agent who can look out for your best interests. this process can be tricky & you stand to lose a lot of money..
1 vote
Jan Bowman, Agent, Georgetown, TX
Wed Mar 30, 2011
Marissa, there are several things to consider. Yes the credit score will play a role in doing a lease purchase. Often you can negotiate a portion of your lease amount to go toward the down payment on the home. Again this is totally up to the owner. As for getting loans, I would suggest you review your credit report, see where the number is and be sure the information is correct on the report. Also, you may find another lender more amiable if your score is marginal so check around. IF it is really low, certainly make your payments on time, pay off all the debt you can. And actively work to remove any mis information on the report. Good luck.
0 votes
Wanda Couch, Agent, Buford, GA
Tue Mar 22, 2011
I always try to discourage lease purchase deals. Dale is right, they seldom make it to closing. The Buyers are let down because they have huge deposit/earnest money at risk. I just read in our local newspaper about a family that entered a lease puchase that would close in 2 years. They had to do massive renovations because the home was old and in bad shape. The price was extremly low so this was still a fantastic deal for them. The sellers were the most honest people you'd ever meet and paid the bank the mortgage payment as agreed. A year and half later, he lost his job and bankrupted. Since the home hadn't officially closed yet, the buyer's property was treated on the same level as a second mortgage holder would be. The buyers lost the deposit, not to mention the time and money spent on renovations. They had to vacate with only a few weeks notice. They had horses and children in school. Even after hiring a lawyer, they still lost it all. They couldn't get a loan because the criteria to get one makes it tougher to qualify. It's best to just rent. Find your home when your credit is fixed. Be safe. Wanda Couch 678-614-5883
0 votes
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