Lease Purchase Agreements Continue To Grow In Popularity

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


#1 By Deborah Garvin at 7/11/2017 3:45 AM

Joe, nice post. One note about "zero-ing out" the mortgage: Generally a lender will use a 25% vacancy factor for purpose of calculating income or debt from a rental property. For example, if the PITI of the property is $1000, the rental income would have to be $1250 to "zero out" the debt.

Also, it is a very good ideal to consult a mortgage professional about the"exit plan" for the buyer on the lease purchase. I have talked with many people through the years that entered into a lease purchase that could not be converted to traditional financing for a myriad of reasons. The most the common issue is that the terms agreed by the lessor/lessee did not conform to the underwriting standards for the future loan. Facts to be aware of: The new lender will usually require a "fair market rent" of the subject property. If fair market is $1000, and the lease payment is $1000, from a underwriting standpoint there would be no accumulation of "down payment" during the term of the lease agreement. Essentially, the acrued "down payment" would be any amounts paid over the fair market rent of the property; irrespective of the agreed amounts on the lease agreement.

I agreed that lease options are a great opportunity for both buyers and sellers;it is just important to plan for the exit from the option period.

#2 By Michael Regan at 7/11/2017 3:45 AM

One thing to note because of the buy and bail policies now in effect, when a buyer is looking to "rent/lease" their current residence, there must be 30% equity in the departing residence to consider the rent/lease income in DTI ratios. An appraisal is done to determine the value. If they don't have 30% equity in their old home, they must qualify using both homes PITI.

I see a lot of sellers trying to do that here with little to no equity in their departing residence and they can't qualify with both payments.

#3 By Joe Manausa, MBA at 7/11/2017 3:45 AM

Thanks Michael and Deborah,

I think you both have hit the heart of the question that "LC" has. I'm curious if the 30% equity is for all loans, just gov loans, etc?

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