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Posted on: 30 May 2018

According to CNN Money, increasing mortgage rates could tame enthusiasm for home buyers before the end of the year. Additionally, first-time buyers are expected to have a more difficult time qualifying for mortgages, especially if they do not have a 20% down payment. Due to these reasons, if you have been planning on selling your real estate property within the next year or so, you may want to consider selling it as a rent-to-own property with a lease purchase agreement. Here's how it works and what you need to know when writing your contract. 

How a Lease Purchase Agreement Works 

With this type of arrangement, you will be giving your buyer the ability to purchase the property at a later time while collecting rent in the meantime. A portion or all of the rent will be used towards the down payment of the property at the end of the specified time, which is typically one to three years. The purchase price of the property, deposit, time frame, and monthly rent amount will be agreed upon at the time of the signing of the lease purchase agreement, and the buyer will be able to move into the property. 

The Goal Is to Improve The Buyer's Credit Rating 

The time period between signing the lease purchase agreement and closing on the house after the specified time allows the buyer additional, often much-needed time to improve their credit rating so they will be able to obtain a mortgage. However, the agreement should specify that the buyer loses interest in the property if they are unable to secure a mortgage after the specified period. Typically, a small deposit is required as well as monthly payments, both of which are usually nonrefundable, but you'll need to check the real estate laws in your state regarding this issue. 

One thing that can help improve your buyer's credit rating is to report their on-time monthly payments to credit bureaus through rent reporting services. Doing this will give your buyer an extra boost in their credit rating, which may be needed for them to ultimately qualify for a mortgage at a later date. However, this does depend on which reports are used by the mortgage company they choose. Inform the buyer to look for mortgage companies that use FICO 9, FICO XD, or VantageScore. 

Specific Stipulations to Include in the Lease Purchase Agreement 

As was stated previously, the purchase price, deposit, time frame, and amount of monthly rent will need to be included in the lease purchase agreement, but there are several important and specific stipulations to include as well. As the owner, you will not be required to return the entire deposit amount to the buyer to use towards the down payment they will need for the mortgage process. The amount of the deposit that you will apply towards the down payment should be included in the agreement. A real estate lawyer can help you determine an appropriate amount. 

Another thing that is crucial to stipulate in the lease purchase agreement is who will be responsible for maintenance, repairs, and upkeep while the buyer is renting-to-own the property. This can be all-inclusive or partial, with each item listed in the agreement, such as who is responsible for appliances, plumbing, heating equipment, roofing, yard maintenance, and so forth. Again, a real estate lawyer can provide you with lists of items and responsibilities so you can make an appropriate determination. However, since the property will still be technically yours until the buyer secures a mortgage at the end of the agreement, it's safest for you to maintain, repair, and keep everything up as much as possible so the property will be in good condition should the buyer be unable to purchase it. 

For additional information, contact a law firm like Wolfe  Jones Wolfe Hancock Daniel & South LLC.