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WHAT'S THE DIFFERENCE?
What is the difference between a lease-purchase, lease-option and rent-to-own program?
"Rent-to-own" is a generic term which may be applied to either of the other two programs. The difference between a "lease-purchase" and "lease-option" are legal in nature. Often, because of the way they are actually implemented, the difference is in name only.
"Lease-purchase" describes the process whereby you are promising to buy a particular piece of property within a certain time-frame, generally at a price determined beforehand. Occasionally, the process for determining the future price is agreed to between the buyer and seller and will be implemented at some future date. An example is where a future price will be determined by an independent, licensed real estate appraiser, paid for by either party or jointly, before the expiration of the lease period. Since a lease-purchase is a promise to buy failure to complete the terms of the agreement leaves you open to legal action.
"Lease-option" describes the process whereby you are only buying the right to buy a home at some time in the future at a given price (or again, at a price to be determined). With a lease option you are under no legal obligation to buy the property ("exercise your option") if you determine that doing so is not in your best interest.
EARNEST MONEY
"What does it cost to get into a home under a rent-to-own program?" Under either program there is an initial payment of money to the seller ("earnest money" or, under a lease option, "option consideration"), usually in an amount greater than the normal security deposit and may be in lieu of a security deposit. Option consideration is not refundable if you don't exercise the option to buy - remember, you're only buying the right to buy the house - but is considered part of the down payment if you buy and close on the property. Earnest money, under a lease-purchase may or may not be refundable (usually not) if you fail to qualify for financing or are otherwise not able to buy the home during the course of the lease. Earnest money is also considered to be part of the down payment that may be required by the seller or lender at closing.
So, if you're buying a $130,000 home and the lender requires a 5% down payment, the down payment would be $6,500.00. If you paid $2,500.00 earnest money when you moved into the property you would only need $4,000.00 to satisfy the down payment requirement at closing.
CREDIT REQUIREMENTS
"Does a lease-to-own program help me if I have poor credit?" Usually, no. Unless the seller is financing the sale of the home and is willing to take on the additional risk, you will be required to apply for and obtain new bank financing at some point during the course of the lease.
We require you to talk to a mortgage company of our choice (because we know them and, through experience, trust them) before proceeding. The mortgage company, within the limits of their ability to forsee the future, must indicate a reasonable certainty as to your ability to obtain financing. Sometimes they may recommend a course of action for you to take, such as paying off certain bills or other financial obligations, or a savings plan that would ensure your ability to fund your portion of the purchase price (the down payment and other normal costs)
If you do have credit problems: We may still be able to help. Depending on what your situation is, you may still be able to rent today and buy down the road. We have several different options that could help, but it depends on what financial resources you currently have available.
“RENT CREDIT”
"I've heard that my rent payments should count toward the purchase price. Is this true?" Our advice is to forget about what that guy on late night TV, cruising the Intercoastal Waterway, surrounded by drop-dead beauties in the skimpiest of bikinis, and hawking books and tapes tells you about rent credit. This is the real world. Most lender's underwriting criteria severely limit the amount of rent credit that will be allowed. It may be that some portion of your monthly rent payment would count toward the down payment (we typically allow 10% of your rent) but you must be careful here. Usually, only that portion of rent that is considered by the lender to be in excess of the normal and usual rental amount for the size of home you're renting will be applied to the down payment. In other words, if the market rate for your home is $1250 per month but you're paying $1400 per month, the lender may allow a $150 per month credit toward the down payment.
If that is the case (and wouldn't I tell you if it weren't?) why not set up your own savings account and earn interest on your money? It requires discipline to do that but so does being a responsible home owner!
A final word about rent credit: you will usually only receive rent credit (if you've decided that's the way to go instead of paying market rent and establishing your own savings account) for those months when you pay rent on time. Miss the deadline by a day and you risk loosing the rent credit for that month.
Any other questions? Please email me and I may incorporate it into future versions of this page.
Doug Wansley
North Atlanta Realty, Inc.
atlantahomesforrent.com
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