Lease-Purchase and Lease-Option Compared

The key difference between a lease purchase and a lease option contract is whether the buyer has a right to walk away from the home after the lease contract expires. In a lease option, the buyer can walk away at the end of the lease period without penalty. A lease purchase contract is structured so the buyer must purchase the home or face penalties for breaking a contractual agreement. In every other way, the two types of contracts are essentially identical.

Lease Option Basics

The basic lease-to-own contract is structured on the same general grounds. A buyer pays the seller some good faith money, called option money, in order to lease the home prior to buying. This money can be substantial, or it can be a very minimal fee. Often, the fee is minimal since these options are popular for borrowers who do not yet have a down payment on a home. The money is not usually refundable and does not go toward an eventual down payment. The buyer and seller agree to a certain contract length. They may agree to a home purchase price at the end of that contract up front. Or, they may agree to determine the fair market price at the time of sale. Typically, a price is locked in. A monthly rental fee is determined. In addition to this fee, the leaser will pay money toward an eventual down payment on the property, making the rent more expensive. No one else can lease or buy the property while it is under contract, which typically lasts for one to three years. At the end of that time, the buyer can exercise the option to buy the home. If the option is not exercised, the buyer walks away free and clear, but he or she may lose the money paid toward the option.

Lease Purchase Basics

With a lease purchase, this entire process is the exact same until the end. When the lease term expires, the buyer must exercise the right to purchase the property; it is not called an "option" because it is not optional. The buyer will have to pay the down payment required and take the mortgage to buy the home. There are typically terms in the agreement that address what would occur if the buyer is no longer eligible for a mortgage or fails to save enough toward a down payment. In these cases, the borrower would technically be in default of the contract. A default on a lease purchase option is similar to a default on any other home contract. The borrower will lose any good faith money toward the purchase. The borrower may have to pay fiscal penalties associated with the default. Then, the borrower may see additional penalties on his or her credit report. This can damage the borrower's ability to secure a home loan or home contract in the future. If a borrower fails to execute the contract or fails to pay damages in the case of a default, the seller can hold the borrower legally accountable.