Doing a lease purchase/rent to own transaction means that you are ready to take the first step to home ownership. You are tired of renting and want to stop throwing money away every month, but your current credit or job situation will not allow you to get a mortgage.
You heard of rent to own homes, also known as lease to buy, and you wonder if it is the right decision for you. There are certain things you need to consider before making a lease purchase decision. The most important being what your credit score is right now.
Option Down Payment
In a lease purchase transaction you will be required to do an option down payment. This down payment is known as option consideration and will be applied to your eventual purchase price, or closing costs on the mortgage. Your lease purchase contracts will have two parts to it: a lease contract, and an option to purchase contract.
The option down payment is to secure the option to purchase. You are essentially tying the property up so that the owner can sell to no one else but you at any time during the lease period. In return for the owner taking the property off the market and letting you tie it up, you are paying the option down payment, which is why it is non-refundable.
Why Your Credit Is Important
Good credit is not necessary to enter into a lease purchase/rent to own transaction. It is expected that you have bad credit. If you had good credit you would simply go buy a home! The reason why it is important to you, is that your credit need to be good enough at the end of your lease period to qualify for a mortgage. You made a non-refundable down payment, and in order to get credit for it, you need to buy the property.
You need to know if one year is enough time for you to fix your credit. Because if it is not, then you want to negotiate a two year lease with the option to buy. Here is a simple rule of thumb: if your credit score is in the 400’s, you need two years. If your score is in the 500’s, you will probably be okay with a one year lease term.
Be Honest With Yourself
Now that you have seen your credit report, you need to be honest with yourself. Is your credit bad because you always had good credit and just went through a temporary situation (divorce, job lay off etc..)? Or is your credit bad because you do not have good financial habits and you never had good credit? If it is the latter, you are now betting on yourself that you will be better in the next year or two about paying bills on time.
Since you are putting down a non refundable down payment, you are betting that your score will be good enough in one or two years. If you don’t change your old habits, you will lose that down payment when you can’t buy the house because of bad credit.
Get The Odds On Your Side
You need to establish good credit by paying bills on time. But that is not enough. You need to also have the bad items removed from your credit. This does not necessarily mean that you must pay old collections. If it is more than two years old it does not affect your credit score much, if you now start paying on it you will make it current and it can make your score go down!
I recommend using a reputable credit repair company to assist you in removing the bad credit items. They assist you to have bad credit items removed from your credit report like it was never there, without having to pay the outstanding debt. The way they do it is to use their knowledge of the Fair Credit Reporting Act to ensure that the bad credit item is valid, and also to ensure that the creditor that put the item on your report had the right to do so.
Did you know for example that many collection companies can not put the collection on your credit report (but they do). You never signed an agreement with the collection company, you signed an agreement with the creditor. Only the creditor can file a derogatory item on your credit report, unless their contract states that a third party can file it on your credit report against you on their behalf. Therefore many collections on your credit is not allowed to be there.
Build Good Credit
Having bad items removed is neccesary, but it is not enough. You also need to build good credit. Additionally, you need three tradelines (loans, credit cards, car loans etc.) in order to qualify for a mortgage. 24 months history on those tradelines are preferred, but 12 months will do. Alternative trade lines in the form of utility bills or cellphone bills can used as well.
But you may have a problem getting a credit card or a loan because of your bad credit. Don’t give up, there is a way. There are credit card companies out there that will give you a credit card no matter how bad your credit is, because it is a secured card. You give them a deposit, and they give you a card with a limit equal to your deposit. Getting this card is very important to you, because they will report your on time payments to the credit bureaus and this will really help boost your score.
Now, Make The Decision
You now have a lot of information. If you are willing to do ALL the above and do your homework on your credit, then doing a lease purchase/rent to own transaction is right for you.