Lenders won't let me exercise my lease option!

By Gina Pogol
Mortgage Credit Problems Columnist

James asks: Dear Gina, I'm trying to close on my home purchase but cannot find a lender to approve this! I gave my landlord/seller 3% upfront when I started renting and she agreed to take that off the price of the house. But every lender I've asked says I can't get credit for my down payment! What gives?

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Gina says:

Dear James,

Mortgage lenders do finance lease option purchases. These home loans are not for people with bad credit, but you can get an FHA loan if your purchase is set up according to the rules. I can see a couple of potential problems with your situation.

First, you say that you paid the seller upfront. In real estate lending, that payment is called "option money." The seller gets that in exchange for giving you the opportunity to buy the property at a later date, presumably when you are better able to qualify for a mortgage.

The paperwork

To get credit for option money paid to a landlord/seller, you must have proof of payment.

That means a paper trail, showing the money exiting your bank account and entering the seller's. Why is this necessary? Because some buyers and sellers have defrauded lenders in order to get the home sold, for example by having the buyer write the seller a check and simultaneously the seller writes a check back to the buyer. There is no actual down payment made.

You must have a written agreement to purchase the home.

To get full credit for money paid upfront, your purchase agreement must specify which amounts paid upfront are option fees and which are rental deposits. If some of your monthly payment is to be credited toward your down payment, your agreement must specify what portion of monthly payments gets credited when you close. Only payments in excess of market rents will be credited. The property appraisal may make this determination.

The dollar amounts

Your sales price must be workable.

Your purchase price must be correct. If the sales price is $100,000 and you pay a 3% option fee upfront, the sales price must still be $100,000, with your $3,000 payment credited. FHA loans require minimum down payments of 3.5% if your credit score is 580 or better. You'd need to bring in the remaining down payment plus closing costs to complete the sale.

Finally, the property must appraise for at least the full sales price for you to be allowed to use all of your option fee as a down payment. When entering into a lease option, make sure the price is fair, or you'll be out your option money and no closer than before to buying a home.

Buyer, beware!

When real estate values are falling, lease options are great ways for owners to unload hard-to-sell property, but poor vehicles for purchasing a home. You are assuming the bulk of the risk.

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