There are situations where interested homebuyers are unable to get approved for a traditional mortgage. In such cases, the lease option to owner financing may be a feasible option.
A lease option to owner financing arrangement is used where a buyer who can’t get a traditional mortgage wants to own a home but at the same time has less than 10% down payment.
A wise investor will not finance a buyer with a poor credit history unless the investor receives a minimum of 10% down. Why is that? Because with the owner financing arrangement, the buyer gets the legal ownership and it takes a lot longer legal process to recover that ownership back in case of the buyer’s default. Therefore, the required 10% is a bare minimum to secure the investor seller in an owner-financing sale.
What do you do if you have a buyer that has only 5% down interested in the house you are selling on owner financing?
The proven strategy is to let the buyer move into the home on a Lease Option structure, where the buyer essentially rents the property with an option to buy it in the future. Since in that arrangement the buyer is just a tenant, the recovery of the property in case of a default is a lot quicker. Thus the 5% down payment (called “option consideration”) is sufficient.
If you, as an investor, are still interested in getting that buyer owner financed, you can write inside your Option Agreement a provision that specifies what happens when the buyer comes up with additional money for the full 10% down payment. When they come up with that money, you will finance them under the conditions that must be outlined in the Option Agreement if that’s what you desire to do.
It is important to specify all the terms, from the interest rate and the length of financing.
You could also decide not to offer the owner financing conversion as part of this Lease Option arrangement.
TIP: if you learned that the buyer will be coming up with a bigger down payment in the future, and if you want to sell the house on owner financing, then it’s better to offer the terms of the owner financing inside your option agreement to that buyer, because that will incentivize the buyer to stay with you and buy your house instead of leaving and looking for some other house.