Lease Purchase Agreements continue to grow in popularity as a solution for home sellers because it increases the pool of potential home buyers for their property. As with any type of creative financing for home buyers, an agreement which allows a buyer to rent for a period of time before buying the property makes it more appealing to those who either have damaged credit or perhaps a home of their own to sell.
We have written numerous posts explaining the benefits of using a lease purchase contract for selling real estate and for buying real estate, but this weekend we received a question from "LC" who writes:
As a seller, if I sell my home through a lease-purchase, what impact will this have on my ability to qualify for a mortgage on a new home during the lease term?
This is a great question because I believe that we will see so many lease purchases in the future that this scenario will be considered fairly routine for home mortgage lenders. But for LC, the answer is fairly simple and we have dealt with this issue since long before we had the housing bubble and the resulting crash.
Mortgage lenders are looking for a buyer's "willingness and ability" to repay the loan. When a potential home buyer is having his or her credit reviewed, an existing lease purchase agreement is going to have very little impact in terms of "willingness" to repay the loan, but the financial ramifications will definitely be considered when the mortgage underwriter calculates the buyer's "ability" to handle the mortgage payment.
The existing home will be considered both a benefit (the rent received from the property) as well as a liability (the expenses of the property). The lender will want to know the overall impact that the lease purchase will have on the borrowers cash flow, and then that impact will be applied when determining the borrowers total debt-to-income ratio.
Ultimately, an existing lease-purchase agreement will have a positive or negative impact on the borrowers debt-to-income ratio during the term of the lease portion of the contract. The amount of the impact will be based upon how strong of a lease payment is received versus how high the existing loan terms are on the home. It is very possible to "zero out" the amount by getting the rental income to exceed to the mortgage payment by an amount that will satisfy all other expenses on the property.
Blog Posts About Lease Purchase Agreements
- Creative Home Selling – Taking A Lesson From Wall Street Using the zero coupon bond concept to help create more home buying and home selling opportunities.
- What Sellers Should Know About Lease Purchase Agreements While this creative tool can be beneficial to home sellers, there are correct techniques to consider and home owners need to understand the risks that they are taking.
- Creative Financing Offers Challenged Home Buyers Potential Solutions Many mortgage lenders are having to say "no" to challenged home buyers, but this technique can still result in a "yes" from some home sellers.
- Cautious Home Buyer Wants To Rent With An Option To Buy Home buyers who choose to rent a home before they actually close on it have to consider some very important issues when drafting the agreement with the home seller.
- Learn more about how a credit repair company might be able to restore your credit faster.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.