I have a property now that I will be potentially purchasing. The owner is willing to do a lease option with me. The home will be under market value with a great ARV. I have a couple of questions that need answering before I can make this decision:

1. When getting traditional financing during the option period, does the lender see the down payment (5% given to the seller at start of lease option) as part of my down payment towards purchase? Do I need to come up with at least 3.5% as down payment because they do not count the first 5?

(5% is taken off purchase price in purchase agreement)

2. Anything I need to look out for that can get me into a bad situation?

1 - No.  There is NO down payment.  The money you put up front isn't a down payment, it's the Option Consideration and it is the full price to you to buy the Option Contract.

2 - Record the Option Agreement