Can’t Get a Loan? Try a Lease-Option

It’s no secret that plunging home prices still make home-buying out of reach for many. The reason? Lenders have become tough and tougher. It’s the old shutting the barn door after the horse has run out gambit. Lenders were so profligate with their money before that now in reaction they’ve become regular Scrooges. Today, many of the best deals, the REOs and properly-priced properties, go to those with 20%, 30% or more down payments and A+ credit. Gone are the no-money-down loans, the no-PMI second mortgages and the no documented income loans…Gone, gone, gone.

So, what to do if your credit isn’t quite good enough right now? Or, you want to buy now, but haven’t yet gotten that down payment together? One possible scenario is to bring back the lease-option contract, fallen out of favor lo these many years of booming home prices.house for rent

What, exactly, is a lease-option? A lease-option is a legal contract between buyer and seller in which the buyer agrees to rent for a specified period of time at a specific rent and has the option to purchase the home at a specified time in the future at a pre-determined price. The details can vary wildly…

Often, the buyer/renter pays an “option fee” up-front, sometimes pays more than market rent for the property, both predicated on the seller agreeing to apply part or all of the option fee and the extra rent to an eventual down-payment on the property. So, if I want to purchase a $300,000 home, I might pay $5000 in option fee to the seller and $2500 a month in rent, instead of $2000, applying the extra rent and half, say, of the option fee to the down-payment. At the end of a year, I’d have $8500 or a good chunk of my down-payment. If, at the end of that year, I wanted to exercise the contract, I’d buy the house. If not, then I’d forfeit the option money and the extra rent.

Bear in mind that the details of the agreement are totally up to the buyer/renter and seller/landlord. The contract could say the buyer gets to apply the whole $5000 or the rent is $2300 with $500 applied or the period is 18 months or the purchase price is $320,000 or whatever the two parties can negotiate between themselves.

The good part about this is that sellers get up-front money for their rental properties with a good chance at selling in the future at a fair price to a qualified buyer. They also get a renter who is more likely to take good care of his property. Renters get to become buyers over time instead of all at once. They get to know the property intimately before buying it outright. As always, renters get to walk if the deal no longer appeals to them. And, sellers get to keep their option money or part of it, depending on the agreement, if they do.

But, there are a few downsides. Buyers must beware as sellers still control the property and may take out more loans or have liens placed as a consequence of court judgments, or, may have already done so. Potential renter/buyers should protect themselves by checking with a title company or a real estate lawyer. Buyer/renters should also make their interest in the property public by recording their legal contract with the County Recorder. That way, everyone is aware of the contract.

This type of agreement is potentially a great deal, especially for the buyer/renter. The seller is locked in for the duration, but the buyer/renter can continue to look at other properties and can always decide to buy another property when the time comes.

What Happens If You Rent & Your Home Is Foreclosed?

Fannie Mae Announces New Policy for Renters in REO Properties
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Recently,  Fannie Mae released an announcement describing a new policy that will allow qualified renters to remain in Fannie Mae-owned foreclosure properties. Formally known as the National Real Estate Owned Rental Policy, it is meant to address the difficulties faced by tenants who – often through no fault of their own – face serious disruptions in their lives because the owner of the property in which they live has been foreclosed upon.

Renters in properties owned by Fannie Mae will be able to stay in their homes after the foreclosure. Note: this applies only to renters in the property at the time of the foreclosure. It does not apply to the borrowers who lost the home or any of their immediate relatives.

Any  type of property  can qualify: single-family homes, condos, co-ops, manufactured housing, or one-to-four unit buildings.

Key features of the new policy are

  • After the foreclosure is complete, renters will be offered the opportunity to either accept an incentive payment to vacate the property (“Cash for Keys”) or they may sign a new month-to-month rental agreement with Fannie Mae.
  • Fannie Mae will not require payment histories or credit checks.
  • Renters will be charged market rents. This means renters may have to pay higher rents.
  • No security deposit will be required. Nothing is said about the former landlord’s possibly unreturned security deposit.
  • The property will be for sale, and may undergo repair or rehab work, during the term of the tenancy. Tenants must cooperate with the sale.
  • If the property sells, the lease will transfer to the new owner who may decide to occupy himself.
  • The property will be managed by a real estate broker and/or a property management company.

Under this plan, tenants, many of whom are not aware their home is even in foreclosure,  are not forced out into the street. But, all leases will be month-to-month, meaning tenants may have to move within 30 days of a sale.

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