So how do you qualify for a lease option?
So they say that lease options are a good ‘option’ (no pun intended) for someone who has bad credit or not enough of a down payment to qualify for a traditional loan. That doesn’t necessarily mean that anyone can, or even should get into a lease to own. Here’s how to determine if a lease option is right for you.
Are you working to improve your credit? – Just because you have some dings on your credit doesn’t mean that you can’t own a house. The benefit of a lease option is that you get to move into the home you will ultimately buy while you’re working on improving your credit. The key part of that last phrase is “working on” improving your credit. If you’ve had a ton of late payments in the past and continue to pay late while your in the lease option home, you won’t be able to get qualified. You must change the habits and circumstances that have caused your credit to decline so you can start improving your credit score. There are a lot of good resources to help you on this journey. So, if you’re working on improving your credit, and you just need a couple years to build your credit score, a lease option is an excellent choice.
Can you build a down payment? Unless you’re eligible for a VA loan, or qualify for some other form of down payment assistance, you will need at least a 3.5% down payment saved up in order to qualify for an FHA loan. The good thing about a lease option is that you can build this down payment while you live in the property. Most of the time, you’ll need to put a lump sum down in order for you to move in, and you’ll usually have a portion of your monthly payment which will apply towards the down payment. The key is that you want to make sure that your upfront payment plus all the other monthly deposits will add up to at least 3.5% of the purchase price by the time your option is over. Many people make the mistake of getting into a lease option without having a plan to build the necessary down payment, and they end up getting stuck at the end if they haven’t planned properly and don’t have the extra money needed. If you can plan on building enough of a down payment to qualify for a loan at the end of your lease, then a lease option is a great choice for you.
Will you be able to afford the mortgage payments when it comes time to purchase? One thing that many would-be lease option buyers fail to consider is what the house will cost them when they have to qualify for a new loan. It’s ok if you need time to increase your income (or pay off debts) in order to afford a higher payment, but you want to be able to plan it out from the start. There are many mortgage calculators available online which can give you an idea of what it would cost each month to own the property you are considering. Just remember, as a general rule, you’ll need to earn about 3x what your mortgage payments are each month (gross income) in order to qualify. Plan ahead so you know what your income/expenses needs to be in order to make the lease option work out.
If you’re prepared to work on your credit, down payment, and income/expenses during the time of your lease, a lease option is the best way to ease into home ownership. There are many lease to own properties that are listed on this website, as well as resources to help you in your journey. If you have any questions/comments about lease to own, please comment on this blog.
