6 Steps – How to Buy a Home with No Down Payment and No Credit

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As a result of the housing market bubble “bursting,” lending guidelines have tightened and the mortgage lenders’ requirement of a down payment for the purchase of a new home has put the dream of owning a home out of many prospective buyers out of reach. Can you still own a home without a down payment or credit?

YES, using a Lease with a Option to Purchase.

Step 1 – FIND A HOME/APT./CONDO YOU LIKE AND WHICH YOU CAN AFFORD MONTHLY PAYMENTS (RENT).

Make sure the property you find is a place you would like to eventually own. Perform some due diligence and see if you can find out anything about the Landlord or property owner from existing tenants or neighbors to gauge whether they are a party that is worth “doing business” with. Ideally, you will want to find a landlord or property owner who is open-minded to creative deals and financing, or a seller who is motivated (or better yet, desperate) to sell their home. The more incentive they have to either rent or sell their home, town home, condominium, the more chance you have to implement and facilitate a deal.

Step 2 – INQUIRE ABOUT A RENT-TO-OWN or LEASE WITH AN OPTION TO PURCHASE.

The idea behind a Rent-to-Own or Lease with the Option to Purchase is simple. You agree on terms to pay rent for a certain rental period, typically between 1-3 years (but I have seen as long as 5-7 years – this is a negotiating point). During the “option” period, just as with ordinary leases, you pay monthly rent (with likely rent escalations each year). At a date certain, under the terms of the agreement, you are granted the option (under the terms of the lease) to purchase the property within a certain period at a purchase price that is mutually determined by the Landlord and you before the lease term begins.

The key to negotiating the LENGTH of time in which you are given the right to exercise your purchase option is to calculate how much money you will need, want, or end up with by the end of the option term to put a “down payment” or receive a credit against your purchase of the property.

For example, say you agree to purchase the property for $100,000.00. If you are paying $1,000.00 per month for three years (i.e., 36 monthly payments) and you have a three-year option to purchase (i.e., you must exercise your option to purchase the property on or before the three year period), if you are given 100% credit for each rent payment, or $1,000 x 36 months, you will receive a $36,000 credit against the purchase price. Thus the sale price of the property would still be listed as $100,000.00, but the property owner/landlord would acknowledge receipt and payment of $36,000.00. Therefore, when you obtain a mortgage from a lender for the remaining $64,000, you are able to show that you already paid as a “down payment,” $36,000, or 36% of the $100,000.00 value.

Step 3 – NEGOTIATE THE OPTION TO PURCHASE TERM.

The longer the option term to exercise your right to purchase the property, the better for you as a tenant. You will want to calculate how much money will be credited against the purchase price by taking the percentage rent times the number of months. For example if your rent payment is $1000 and you receive 30% rent credit over a 3-year option term, that is $300 x 36 months = $10,800 credit (deemed paid to the property owner) against the purchase price.

You should then evaluate that “down payment” against the value of the home to see if you would be able to obtain a loan for the remaining unpaid purchase price balance. For example, if the purchase price is $100,000 and you have a credit “down payment” of $10,800, you would still owe and need to obtain a loan for $89,200. The percentage rent credit you received could be deemed, in essence, a 10.8% down payment made against the property for purposes of obtaining a loan from the lender.

Therefore, the more money you are able to accumulate based on the negotiated option term, the bigger “down payment” you will have credited against the purchase price.

Step 4 – NEGOTIATE THE OPTION TO PURCHASE TERM AND PERCENTAGE OF RENT THAT YOU WOULD RECEIVE CREDIT AGAINST THE PURCHASE PRICE.

You should negotiate the percent of the rent you pay which you will receive credit against the ultimate agreed upon purchase price (see STEP 4). The percentage should be relative to the option term. The shorter the time period in which you are able to exercise your option to purchase, the higher the percentage of your rent payment that should be credited towards the purchase price of the property. For example, I have seen 100% credit of rent paid for a 12-month option term. That is, the tenant has to exercise his option to purchase within 12 months of the commencement of the lease in order to receive 100% credit for all rent payments. This is assuming that at the end of the 12-month period, the total rent payments will serve as a sufficient “down payment” to enable the tenant to obtain a loan/mortgage for the remaining balance.

Typically, however, you should aim to receive at least 30% or more of your rent payments credited against the purchase price. The percentage will be based on a number of factors including, for example, the type of property, its location, its present value, the motivation of the property owner to sell, to name a few.

Step 5 – NEGOTIATE THE PURCHASE PRICE.

You should negotiate the purchase price as PART OF the lease agreement. Obviously, the lower the purchase price, the better for you. To determine the current market value, you can ask a local real estate agent to provide you with a present market analysis based on recent home sales in the area.

The purchase price should probably reflect the estimated value by the expiration of the option purchase term. For example if the option term is three years, and the fair market value of the property is $100,000 today, if you both agree that the property will likely appreciate, the purchase price should include 3 years of appreciate (e.g., $110,000 or $115,000). You would not want the purchase price determined at a later date because that could be a variable that the property owner should manipulate to his or her unfair advantage.

Step 6 – HIRE AN ATTORNEY TO REVIEW.

It is recommended that you hire an attorney to help you either draft the lease agreement with the option terms, or have an attorney review a draft of the agreement given to you from the property owner. Also, your attorney can review any existing association by-laws or rules (if any) that may prohibit the property owner from renting out to you.

Original article by a licensed corporate and tax attorney.

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