A: When a seller lets the buyer lease with an option to purchase the property with a delayed settlement for a specific price within a certain amount of time.
In most lease-option situations, a part of the rent could be applied towards the down payment if the buyer is short on cash.
Q: How do lease options work and what are the benefits?
A: Most lease-option agreements specify that a portion of the rent on the property in question is applied toward the purchase if the option is exercised. This is referred to as rent credit. Institutional lenders accept rent credits as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.
Lease-options should be read carefully for details on transferring the option and other important concerns.
Q: What is seller financing?
A: Homeowners who are anxious to sell often consider seller financing, which may include taking back a second note or even financing the entire purchase if the seller owns the home free and clear.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
Q: What are the benefits of seller financing?
A: Seller financing offers benefits to both buyers and sellers including tax breaks for the seller as well as offering an alternative when conventional loans can't be found.The risks involved are the same risks facing any lender. Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
Sellers should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that should be met.
Q: How are the rates set for seller financing?
A: The interest rate on an owner-carry loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.