Items you will need
- Lease contract with option to buy spelled out
- Proof of income
- Previous two years tax returns
- Banking information
- Copies of canceled rent checks
- Copies of deposit checks
- Credit report
There are numerous reasons to lease a home with a purchase option in the lease contract. Leasing for a period of time allows the future homeowner to try out a neighborhood or school district. On the seller's side, the seller may need to move before quickly. Leasing it to a tenant who thinks he wants to buy, but cannot close immediately, covers the seller's mortgage payment allowing the seller to move forward. A lease with option to buy can also freeze the purchase price. A lease with option to buy obligates the seller to sell, but does not obligate the renter to buy.
Review the lease contract. A lease option contract should spell out the lease period and the option period's expiration date. It should cover the option funds (deposit money) and what happens to it at the time of closing. It may also spell out rental credit (if any) and sale price. If the sale price is included, it should state who pays for closing costs, inspections, etc.
Pay all lease/rental payments with a check. This is of utmost importance. The seller has an interest in your financing being approved. The lender will not allow him to provide rental verification for you in a mortgage transaction. All payments must be proven and documented. The same is true for any deposit money paid. Keep all canceled checks and cashiers checks in a file. Don't assume that written receipts for cash payments made to the owner will work; they won't.
Early in the lease period, get a copy of your credit report to see if anything negative may be on your report that has lowered your scores. This can cause you problems in getting financed. Doing this early on gives you time to resolve issues
Call a broker or lender and have them pre-qualify you for a loan. Do this very early in your lease period. (If you are aware that you have credit issues, do this before you sign a lease with option agreement.) Discuss various options for loans and down payments. Explain your situation and as for suggestions to get mortgage-ready. Determine the amount of down payment you will be required to provide.
If, after several months, your credit report is in good shape and you have the necessary down payment, inform the owner of the home that you have decided to exercise your option to purchase. A lease option may be modified if a price was not established earlier. Be sure the seller includes how much he is willing to contribute toward closing costs. If you have paid an upfront deposit that is being credited to you, you must show proof. Present copies of cashier checks or canceled checks for deposits made to the seller. Make an appointment with the lender who pre-qualified you, letting them know that you are now ready to move forward.
Apply for a purchase loan with your lender. Supply your lender with the option agreement/sales contract and all documents requested. Discuss costs and credits. Determine how much money you will need to close the loan.
Now is the time to shop around for homeowners insurance. Inquire if a survey and infestation clearance letter are needed to close; not all loans or states require these. Surveys are expensive and time consuming, but the seller may have one which you can use. It is customary for the seller to provide the infestation clearance letter. Find a title company or attorney who you wish to handle the closing of the loan. If you have no preference, the lender will set this up and project a closing date.
Wait for your lender to state that you are "clear to close." Request a copy the closing statement and ask questions about anything you don't understood. Ask if your state is a "wet funds" state, meaning that all funds collected at closing must be in the form of a cashiers check. Attend the closing at the required time. Sign and date all documents as the closing agent instructs you.
If your lease option contract allows any part of the rent to go toward a down payment, understand that lenders will only credit this if it can be proven that you are paying more than market value rent for your area. Example: If you pay $1,000 per month, with a credit of $100 per month to go toward a down payment, and the market rents are actually $1,200 (as determined by appraisor), you are under market and the only way the credit of $100 per month can be given to you is for the seller to reduce his sale price by that amount. On the other hand, if you are paying $1,200 per month, and the market rents are $1,000, then you are paying over market and if the seller agrees, a credit of as much as $200 per month could be used as part of your down payment.
FHA may be the best type of loan for you since it requires a lower down payment. Not all lenders are approved for government lending. Don't be pushed into a conventional loan if FHA serves your needs better. If you choose to get an FHA loan on a property that you are currently renting, FHA states that you must have rented the home for six full months before you can receive financing through FHA.