Your grandma and her ma before her knew how to pinch pennies. Bet they knew where every dime of their household income went. Do you? Don't kick yourself if you don't. It's tough in this day and
If you're ready to buy the home of your dreams, but your credit or savings isn't quite ready yet, a lease with option to buy (often simply called a "lease option" or, somewhat inaccurately, "rent to own") may help you move in. Lease options, in which you lease (rent) a property and have the option to buy the property at the end of the lease term, can allow you to control a home that you want even if you don't have enough money for a down payment yet. A lease option may also be helpful if you need some time to improve your credit before you can get a good mortgage rate.
Find a house you want to buy. Keeping considerations in mind, look for a house that you like and that you can afford. There are some companies that specialize in lease options, and there in some places government programs will buy a house for you and then offer you a lease option. More typically, however, you can just find a house for sale and see if the owner will consider a lease option.
Discuss the lease option with the owner. Some homeowners have never heard of a lease option, and many are suspicious of them. In addition, some sellers need a lot of cash fast, and so there's no way they can do a lease option. Still, if you're lucky, you or your real estate agent may be able to convince the seller to work with you.
Get a home inspection. Once you've found a suitable house with an agreeable seller, it's time to get the home inspected. Get an independent professional home inspector to do a full inspection so you can become aware of any problems the house may have. In most jurisdictions the seller is also required to give you a seller's property disclosure attesting to the condition of the home, but an independent inspection is still important. If there are problems, make sure they're not issues that will prevent you from getting a loan, and make sure the contract specifies who is responsible for making repairs. The lessor may also offer an allowance off the purchase price to enable the lessee to make the repairs if the option to buy is exercised.
Negotiate the terms of the lease option. The purchase price, term of the lease (usually anywhere from 6-24 months), the amount of initial option money, and the amount of the monthly payments that will go toward the purchase price will all be negotiable. While you can find lease option contracts online, it's best to get one from a local real estate agent or attorney, since laws concerning lease options vary from state to state, and there may even be local regulations. A real estate agent or can help you draft the contract and negotiate the terms, and it's important for both the buyer and the seller (lessee and lessor) that the contract be well written.
Pay an option fee and sign the contract. The option fee is the upfront "consideration" that is necessary to make the contract binding. Pay this and sign the contract only once you are sure you understand all the terms of the agreement and you agree with them. In many cases, the lease option contract will be an addendum to a regular sale contract.
Check on your insurance needs. Since you now have an interest in the home, you may require additional insurance to protect the home and cover your increased liability exposure. The laws vary from place to place, so check with your insurance agent to find out what coverage you need.
Make monthly payments. You will make monthly payments just as you would make rent payments. In many cases, however, a portion of the monthly payment will be designated as option money. This money will go toward the purchase of the home if you decide to exercise your option to buy. It may be a small percentage of the monthly payment or it may, if you're very lucky, be the whole payment. Again, however, the option money will generally be over and above the fair rental value, so the monthly payments will be more than they would be to rent the same house.
Make improvements on the home. If the home inspection turned up minor problems, or if the home needs a little remodeling or cosmetic care, it is probably in your best interest to try to take care of these things. By increasing the value of the home with improvements during the lease term, you earn equity (so-called "sweat equity") in the home because the agreed-upon purchase price stays the same. This increased equity may help you get a more favorable loan if you exercise your option to buy. In essence, by increasing the value of the home you are increasing your down payment.
Apply for a loan. Don't wait until the last minute to apply for a loan. You should begin your application process no less than 45 days in advance of the end of the lease, and to be safe you should probably start a full two months or more before you need to buy the house. It's essential to have a mortgage ready to close on the home by the date specified in the lease option contract.
Close on the home. If you've lined up your financing and decided to exercise your option to buy at the end of the lease, congratulations. You are now a homeowner!!!
Blog by Andrea Forte REALTORÂ®
The Supreme Commander of The Real Estate MarketPlace and A Good Guy, In General! Ron "Chip" Franks was born in 1972 in the thriving metropolis of Killeen, Texas and makes his profession there as on....