What is Owner Finance or Lease-Purchase?

Updated

Saturday, May 07, 2005

What is Owner Financing or Lease/Purchase?

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Owner Financing & Lease/Purchase.

Owner Financing simply stated is a seller willing to help a buyer of a house by financing part or all of the purchase price. Usually, the Buyer makes a down payment and the Seller will carry a first mortgage, second mortgage or an Agreement for Deed (also called a Land Contract).

A Lease/Purchase agreement usually is two separate agreements between the parties: a Lease and an Option Agreement. The Lease Agreement is a fairly standard rental agreement for a Lease/Purchase scenario. The Option Agreement is a purchase/sale agreement where as the tenant/purchaser has the exclusive right to purchase the house for a specified price and term. The price of the home may increase if the Option Agreement has a term on many months or years. The Seller cannot sell the house to anyone else as long as the Option Agreement is in force.

The tenant/buyer leases the house for a specific monthly rent and for a specified term. Part of the rent may or may not be applied to the purchase price. The Earnest Money Deposit (also called an option fee), price and terms of the sale are negotiated in the Option Agreement.

The Lease Agreement usually has a cross default clause - if the tenant/buyer does not pay the rent as agreed in the Lease agreement, the Option Agreement is null and void and the Earnest Money Deposit is forfeited by the tenant/buyer.

Lease/Purchase arrangements work very well with buyers needing to improve their credit. The tenant/buyer can find a home they wish to purchase, move in, enroll their children in school and enjoy the home while rebuilding their credit. The on time rental payments will help build the tenant/buyer's credit rating. We will coach and mentor the tenant/buyer on methods to improve their credit.

Many lenders consider the execution of the Option Agreement as a refinance loan instead of a purchase loan. A refinance loan usually has more liberal underwriting criterion than a purchase loan. Therefore, refinance loans are easier to qualify. Also, increased equity may be considered in the loan to value calculation.

I personally recommend sellers lease/purchase a home to a tenant/buyer before carrying a mortgage for the buyer. This way, the seller will have a payment history with the buyer - does the tenant/buyer make the payments as agreed. Foreclosure of a mortgage is much more difficult and lengthy process than an eviction on a lease agreement.