Lease Options Should Be Land Contracts
There Is a Way To Secure a Home Purchsase Without a Mortgage
Mar 15, 2009
A lease option allows you to rent a property with the exclusive option to purchase within a specific time. But you would be better off with a land contract. A land contract is similar, but more binding. It permits institutional refinancing to pay it off. If the property value is high enough, there will be no need for a down payment or out of pocket closing costs when you do refinance.
The Time Frame for Full Payment
This should be as long as possible. With land contracts, two to three years is usually acceptable. But it can be as little as one year or as long as five. Find out from a mortgage professional, preferably a seasoned broker, how long it may take you to cure your inability to obtain mortgage financing from no credit, bad credit or insufficient work history or income.
The Deposit Amount
The seller will often want an amount of money as a non-refundable deposit. This is negotiable. Make it as little as possible. That money goes into the owner's pocket if you default and get evicted before you refinance to have title transferred to you. The same is true if you don't wind up buying. If you do buy, it goes toward the purchase. So make sure it is recorded in the contract and that you have a paper trail of your deposit. A canceled check works best.
Who is on Title and is Title Clear?
You can do your own title search at the County Clerk's Office, or have someone who works for a title insurance company do it for you. Make sure title is in the name of the person offering the contract and no others. Make sure that the mortgage liens on the property do not exceed the owner's asking price.
Make sure there are no other liens or court judgments. Make it clear in writing that the owner is responsible for liens or judgments and must pay them off or give back the deposit. If the total amount of liens exceeds the property's cost, refinancing the land contract becomes impossible. So be sure the final cost makes sense.
Is the Owner Current on the Mortgage?
Occasionally, an owner continues to collect payments and not pay the mortgage on the property. Then the place gets foreclosed, and you lose the place and your money. You can protect yourself three ways.
1) Demand proof that the mortgage is current. The most recent mortgage payment stub can show that.
2) Have it in writing that if the mortgage lender issues a notice of default, the lease option is void and you get your deposit back.
3)Set up an escrow account. When you make your payments to it, the escrow account pays the mortgage lender.
Some areas have escrow companies that do this. Or it can be set up at a bank, especially the bank servicing the mortgage. Always pay by check and keep your canceled checks. A documented payment history is required by lenders to pay off your land contract by refinancing it. By refinancing the land contract, you could wrap all the closing costs into the loan. You could even get cash back if the appraised value is high enough when you refinance!
Record the Land Contract
This is done at the County Clerk's Office or County Recorder's Office. It opens up more possibilities of lenders who would be willing to refinance you out of the land contract. Keep copies of everything on file for the time when you apply to finance out of the land contract and become the person on title.
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