The Lease Option Magicians
These insightful tricks can help buyers and sellers close a lease option deal much faster
Many sellers, who try to sell a home through a lease option or rent to own program, often wind up in a situation where their already moved in lessee-buyer cannot execute the actual purchase because they can’t position themselves to qualify for a mortgage. This is because sellers often don’t screen lessee-buyers the right way; unaware of the skill sets and procedures that are needed to bring a lease option buyer to the closing table. Allowing a buyer to lease, who doesn’t have a shot in the world of ever obtaining traditional mortgage financing, is simply a waste of everyone’s time and money. This article showcases the “magic” tricks that seasoned sellers and real estate investors perform to close lease option buyers in as little time as possible. These tricks are surprisingly simple and can be used by anyone regardless of experience.
A lease option magician’s “assistant” is a mortgage professional
A lease option seller’s “magic hat” is a mortgage professional; more specifically a mortgage broker or a loan officer that works at a mortgage brokerage. A mortgage brokerage possesses the people, and the types of lenders needed to structure tricky deals such as lease options. Because mortgage brokers have the ability to close deals through many banks, the chances of a lease option buyer obtaining a mortgage and closing the deal is drastically increased. Unlike a mortgage broker, a bank loan officer is limited in mortgage finance options and can only structure deals based on their particular bank’s current mortgage product guidelines. This limits a lease option buyer’s finance options, which can inhibit their ability to make it to the closing table. This doesn’t necessarily mean a lease option buyer or seller should avoid bank loan officers though. Sometimes banks have niche mortgage products for potential buyers that mortgage brokers can’t access. While a mortgage broker offers the highest probability for a lease option buyer to obtain a mortgage, the best bet is to get to know bank loan officers at several area banks on top of selecting a good mortgage brokerage to work with.
While a mortgage broker or bank loan officer’s main job is to close loans for borrowers who can obtain a mortgage, their expertise also lies in the area of getting prospective borrowers to qualify for a mortgage that, for whatever reason, can’t. Mortgage brokers and bank loan officers usually don’t mind the challenge of building a lessee-buyer’s credit file, because they will get paid a commission from originating the lessee-buyer’s loan when the deal closes.Most lease option sellers try to screen and select a lessee-buyer themselves, without understanding current mortgage lender guidelines. It is best for lease option sellers to work hand in hand with a reputable mortgage broker who can select the right lessee-buyer; one who has the best shot at qualifying for a mortgage within a reasonable timeframe.
Co-borrowers or alternate borrowers can be a “magic wand”
During the application and screening process, it is important to note that a co-borrower can often times be used to strengthen a lessee-buyers mortgage file. Generally a co-borrower is the spouse of the borrower. Generally a co-borrower’s income can be used to supplement a borrower’s income, or a co-borrower can help contribute towards a down payment. It is a wise idea for the seller or the selected mortgage professional to ask the lessee-buyer about the possibility of a co-borrower during the application and screening phases of the lease option transaction. Co-borrowers often times shed light on lease-option transactions and help the mortgage professional structure eventual mortgage financing.
In other cases, a potential lessee-buyer may be better served by using an alternate borrower in their place. This could be a family member or a friend of the lessee-buyer who has a stronger credit or financial scenario, and doesn’t mind having the home financed in their name in place of the lessee buyer. In a situation where a potential lessee-buyer has abysmal credit and personal finances, an alternate buyer may have a much better credit and financial scenario and everyone would be better served running the deal in the alternate buyer’s name instead. A scenario like this is a long shot but may be a feasible option with the guidance of a mortgage professional and approval from the lease option seller who must structure the lease option contract in the alternate borrower’s name.Remember that most lease option buyers will probably have some sort of credit or financial shortcoming at the time of application. Knowing which buyer shortcomings are irreparable and which ones can be fixed can mean the difference between closing the deal, or getting stuck with a perpetual lease.
“What If” Reports are a crystal ball
A tremendously useful tool commonly used by experienced lease option sellers is a What If Report. Commonly called a Credit Score Simulator, a What If Report is a personalized step by step guide, generated by credit reporting agencies, which shows a potential borrower what actions to take to improve their credit scores. Best handled through a mortgage broker, a credit score simulator can help determine if a lessee-buyer has the potential to obtain a mortgage by doing various things such as paying down current credit card debts, judgments or collections. Many consumer accessible credit report vendors also offer this service.
Most helpful is that actual score increases are shown through these simulators and matched to the various actions a potential borrower can opt to take. For example, a credit score simulator shows that a potential borrower has a $900 collection that, if paid off, will increase their three credit scores an average of 20 points. The simulator also shows the potential borrower has a $1,500 credit card balance. By paying the credit card balance down by $751, the borrower’s three credit scores will jump up an average of 40 points. Using the information generated by the simulator, the potential borrower can decide which actions to take that will impact their scores the most, and learn how much each action will cost. In this example, it is actually cheaper to pay down the credit card by $751 than it is to pay the $900 collection off. Choosing to pay down the credit card also bumps their credit scores 20 points higher than choosing to pay the more expensive collection off. If the borrower can afford to pay down both of these debts, a whopping 60 point increase in credit scores would be realized. That’s the power of this insightful credit enhancement tool. It’s a crystal ball at your fingertips and can be used to help close a lease option buyer by raising their credit scores to levels that mortgage lenders will work with.
Assisted debt pay downs can “speed up” time
Using the information gathered from a What If Report, a lease option seller may opt to assist the potential buyer in paying down a few small debts or collections if the resulting credit score increase will qualify the buyer for a mortgage as deemed by the mortgage professional. It is usually not a good idea for lease option sellers to get involved in a buyer’s finances, but if the debts or collections are small and a contract is drawn between the seller and buyer with the buyer’s promise to repay then this may get the deal closed faster than anticipated. Sellers need to be sure that if this option is exercised, that the buyer has sufficient enough income to repay. Sellers also need to acknowledge that this is a risk that may never pay off. A better option is to have the buyer seek a small loan from a family member or friend to pay down debts or collections in an attempt to jump credit scores stemming from the results of a What If Report.
Make the down payment appear out of thin air
The actual lease option agreement can be pivotal for lease option sellers. Many mortgage lenders allow for the source of a lessee-buyer’s down payment to come from the monthly lease payments. This means that lessee-buyers who may have great credit, sufficient income and a good job history; but lack a 5% or greater down payment can accrue a down payment on the subject property over time through their monthly lease payments to the seller. This option needs to be documented within the lease agreement and shown to the mortgage lender during the application process. A warning to sellers is that lessee-buyers who move in with a low down payment can cease lease payments and live in the subject home until they’re evicted; a very costly mistake for a seller to make.
Poof! Sell on a Land Contract
Often times, lease option sellers fail to see what could be a more beneficial sales technique for their particular deal: a land contract sale. By selling a home using a land contract, ownership of the home is turned over to the buyer. This leaves the seller in the position of a bank; accepting monthly payments and recording an official mortgage lien against the property to protect their financial interests. Holding a land contract and attached mortgage is a tremendous position of power for a seller who can then sell the mortgage note to a “note buyer” or a mortgage lender. Lease option sellers do not have the luxury of selling their contract early and must wait for the buyer to cash them out. The danger with selling a home on land contract is that the seller must foreclose on the buyer if they cease making payments. The foreclosure process can take several months to a year and is very costly. For more on the pros and cons of selling a home on a land contract versus a lease option, please read our sister article also found in this month’s issue: Lease Option vs. Land Contract