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HomeHomes
Published: Friday, 7/11/2008

Your Mortgage Questions Answered

Q. I have seen a property that I might consider purchasing. The owner said that he is willing to arrange a lease-purchase agreement. How do these work?

A. A lease-purchase agreement is a contract that commits the future purchase of a property. The difference between a standard sale and a lease-purchase is that a person can move into a home with little or no money down, and make rental payments for a specified period of time. A portion, usually a percentage, of each rental payment is then applied to a down payment. The renter purchases the property at a later date with the accumulated down payment. This type of an arrangement is open to negotiation, as there are no hard and fast rules that must be followed. A renter may use the option after the first year, or he/she may have up to three or four years to buy the property. The percent that is withheld is also negotiable and could range from 5 percent to 10 percent or more, or it could escalate, with 3 percent applied to the down payment the first year, and 6 percent being withheld the second year. Every point in the lease-purchase agreement also is open to negotiation. A seller who is having difficulty selling the property often offers this type of arrangement.

Q. What should I look for when signing a lease-purchase agreement?

A. Expert legal advice will likely ensure your interests will be protected, especially because there are so many negotiable points. If you are going into such an arrangement without legal counsel, however, at the very least make sure the following items are addressed.

Determine how many months that you, the buyer, will make rental payments before purchasing the property, and how much of each monthly payment will be applied to the down payment amount. A final sales price should be determined in advance, with an independent appraisal performed on the property. If the seller is financing the mortgage, which is fairly common in these types of situations, you might also discuss the question of the mortgage rate at the time of the sale. If you finance through a lender, however, you will pay the current rate based on credit history, appraisal, and so forth. Also, be on the lookout for any clauses in the agreement that give the seller the right to unfairly back out of the deal.



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