Lease option mortgages can be a great way to become a homeowner, especially if you don’t have the credit or down payment required for a traditional mortgage. However, before you sign on the dotted line, it’s important to understand what you’re getting into and whether you’ll be able to qualify for a mortgage when the lease option period ends.
What is a Lease Option Mortgage?
A lease option mortgage is a contract between a landlord and a tenant that gives the tenant the option to purchase the property at the end of the lease term. Typically, the tenant pays a non-refundable option fee upfront and a portion of their rent goes towards the purchase price of the home.
During the lease option period, the tenant is responsible for maintaining the property and making all necessary repairs. At the end of the lease term, the tenant has the option to purchase the home at a predetermined price.
What Are the Pros and Cons of a Lease Option Mortgage?
There are several pros and cons to consider before entering into a lease option mortgage:
Pros:
- No down payment required
- Lower credit score requirements
- Option fee and portion of rent go towards purchase price
- Potential to build equity
Cons:
- Higher monthly payments than traditional rent
- No guarantee of mortgage approval at the end of the lease term
- If tenant decides not to purchase, they lose the option fee and portion of rent paid towards purchase price
- Potential for landlord to sell property to someone else during lease option period
Do You Need to Qualify for a Mortgage at the End of a Lease Option Mortgage?
Yes, in most cases you will need to qualify for a mortgage at the end of the lease option period in order to purchase the home. This is because the lease option agreement is not a mortgage, and the option fee and portion of rent paid towards purchase price do not count towards a down payment.
When the lease option period ends, you will need to apply for a mortgage just like you would if you were purchasing any other home. This means you will need to meet the lender’s credit score requirements, have a stable income, and have enough money saved for a down payment and closing costs.
Should You Ask Mortgage Lenders to Qualify Your Lease Option Mortgage?
It’s a good idea to talk to a mortgage lender before entering into a lease option mortgage to find out what their requirements are and whether you’ll be able to qualify for a mortgage at the end of the lease term.
By getting pre-qualified or pre-approved for a mortgage, you’ll have a better idea of how much you can afford to spend on a home and whether a lease option mortgage is the right choice for you.
Conclusion
A lease option mortgage can be a great way to become a homeowner, but it’s important to understand the pros and cons of this type of agreement and whether you’ll be able to qualify for a mortgage at the end of the lease term. By talking to a mortgage lender and getting pre-qualified or pre-approved, you’ll be able to make an informed decision about whether a lease option mortgage is right for you.