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Beware Lease Options for People with Credit Problems

By Gina Pogol
Mortgage Credit Problems Columnist


Al Asks: Dear Gina, I want to buy a house while prices are low. The problem is that the economy hit me the same way it hit a lot of other people--hard. I was unemployed but now I have a good job. I don't know if there are bad credit mortgage lenders out there. I did see an ad for a house that I could buy with a lease option. Should I do that, and then refinance it when I've been on the job longer and have better credit?

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Gina Says:

Dear Al,

I'm glad that you found a job. You are right; after a stint of unemployment, lenders want to see a stable job history and decent credit before lending to you. But you might want to hold off buying with a lease option, or at least be careful.

Lease Options Have a High Failure Rate

A lot of shady characters make a good living reselling the same homes over and over again. They offer their homes to people with credit problems or who don't have a lot of savings, and it seems like a good idea. You get your home now with a down payment that's huge for signing a lease but small for buying a home, and part of your (higher-than-market) rent goes each month toward your down payment. You expect that sometime during the term of your option period, you'll have enough saved and good enough credit to exercise your option and buy your home. But some lease-option outfits only actually sell the homes to 5% of the people who sign on for lease option deals and put up thousands of dollars. These folks end up far worse off than they were.

Impossible Terms

Lease options are not well regulated. In many cases, all the would-be buyer has to do to invalidate the deal is make one rent payment late--check the fine print--and it's over. All the money is forfeited. Another part of the lease option deal is the sales price--many who sign up don't realize that they are paying thousands of dollars upfront for the privilege of over-paying for a home two years down the road. So when they figure it out, they walk, and the option dies on the vine. Finally, to exercise a lease option, you have to be able to get financed. Suppose you get a lease option on a manufactured home, a condo, or just a place with deferred maintenance issues? If you can't get an FHA loan, you may need 20% down. If you were counting on bringing only 3.5% you are out of luck--again, you can't follow through with your purchase.

What to Do

First, complete the form on this site. If there's a bad credit mortgage out there for you, you'll know it. Second, if you decide to enter into a lease option with the plan of getting an FHA mortgage, contact an FHA lender first. Learn what you need to do to qualify for a loan. Then, before you pay for a lease option, get an FHA appraisal. They cost between $50 and $100 more than a regular appraisal, but you'll know if the home will pass muster with FHA before you involve your heart and your money. Good luck!

Sources

http://www.johntreed.com/

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