Considering a Lease with an Option to Purchase? 4 Common Questions

It is not uncommon to enter an automobile lease with an option to purchase; in fact, borrowers choose this frequently as a way to try out a vehicle for years prior to buying the costly asset. With a home, though, the option is less common. The benefits of a lease to purchase option are the same with a car or a home. You get to try the asset out, decide if you would like to invest in its purchase, and then pursue a sale. 

#1 Why Does a Seller Offer this Option?

To a seller, this option is an opportunity to have a mortgage paid by another renter for a period of time. This is valuable in a slow real estate market when a seller cannot find a buyer for a property. The seller may have purchased a new home, transferred to a new area or simply want to move on. Instead of waiting for a buyer, a seller can offer this option to gain relief from the current mortgage without finalizing a sale contract.

#2 How Much Does it Cost?

There may be a small down payment, like a security deposit, required on a lease to purchase option. Beyond this, you will be paying rent to live in a home. This rent is then supplemented by an additional fee that will go toward the down payment you provide on your purchase if you decide to go through with the option. On the one hand, this is extremely helpful for individuals who may not have the cash right now for a down payment but would like to own a home in the near future. On the other hand, it makes renting the home very expensive in the short term. Additionally, you will pay more if you lease your home before owning it than if you buy it today.

#3 When do I Get a Loan?

You do not need to get your mortgage loan until you decide to purchase the home. However, lease to own sellers often require very high credit scores and other criteria from their borrowers. The sellers want to assure you will be able to get the loan when the time comes. Further, high credit borrowers tend to maintain the property to a higher degree. If you decide to back out of the purchase option, the seller need to be assured the home will still be in good condition for sale to another interested party. 

#4 What if I Change my Mind?

A lease with "option" to purchase is called an option for a reason: you do not have to purchase the home if you decide you do not want to. You will lose all of the payments you made toward the equity in the home thus far. You may also lose your security deposit if you fail to meet maintenance requirements. After this, however, you will be free to leave after the lease period expires on the purchase option. Walking away from the option will not harm your credit or come with any additional penalties.