When buying a Charlottesville VA home, remember that a lease purchase can come with pitfalls.
In the current mortgage situation many homebuyers are not able to meet the downpayment requirement. Whether it is a conventional loan requiring 20% down or a FHA loan requiring 3.5%, they just don't have access to the cash. In that case many homebuyers think that rent to own or a lease purchase is a great option. The allure is that while paying rent they will be on their way to homeownership.
In a typical lease purchase situation, a portion of the rent will go toward the downpayment. There is a contract of sale for an agreed upon price; however the contract will not close until a date in the future. This date could be in 6 months or 3 years, it depends on what the parties agree to. During the rental period a predetermined amount of the rent will be held by the seller to apply toward the downpayment or to buy down the purchase price if the buyer has money for the downpayment.
This situation sounds like "just what the doctor ordered", right? Not necessarily. FNMA will only allow the part of the rent that is above the value of the fair market rent for that type of home in that particular area to be applied toward the down payment. For example a buyer could be paying $1000 a month in rent for 10 months with the seller applying $500 each month toward the down payment and $500 for the rent. The buyer is counting on having $5000 toward the down payment by the end of this time. However, when it is time to close, the real estate appraiser decides that the rent for this particular type of home in this area is $750/month not $500/month. All of a sudden the buyer only has $2500 toward down payment and is not able to close.
Another point to remember before you commit to a lease purchase contract is that in a year, or however long it is before the contract will close, home prices may not be where they were when the contract for purchase was origionally ratified. If prices have fallen, the homebuyer will be paying more than they would be for a comparable home if they were just submitting an offer. Of course the opposite could happen as well. If prices rise during the lease period, the buyer will get more home for his money and the seller will lose out.
A final pitfall for the seller is the possibility that the buyer will not qualify for a loan in a year and will be unable to purchase when the lease period runs out. It is important as a seller in a rent to own situation to have a clear picture of how many areas in which the buyer has to improve in order to qualify for a loan and whether there is a good chance that the homebuyer will be able to purchase in a year.
For the informed homebuyer or seller this can be one more way to sell or purchase a home, but it is important to have examined all of the possibilities. Don't be scared of the lease purchase but rather perform your due diligence and make sure that you have avoided all of the pitfalls. It is a good idea to engage the services of an attorney who has experience with this type of contract as well as using the services of a Real Estate professional.
Contact Pam Dent, e-PRO, SRES, NHD, REALTOR®, Real Estate III, Charlottesville, Virginia at 434 960-0161 to buy a property in the following areas in Central Virginia: Charlottesville, Albemarle County, Keswick, Glenmore, Ivy, Crozet, Earlysville, Free Union, Cismont, Scottsville, Fluvanna County, Palmyra, Lake Monticello, Louisa County, Louisa, Mineral, Spring Creek, Orange County, Gordonsville, Orange, Barboursville, Greene County, Ruckersville. Email Pam Dent.
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