Lease Purchase Programs Come Of Age

A new breed of lease-purchase home buying programs are springing up like daisies and they couldn't be sprouting at a better time.

A viable tool for cash-poor, but income-rich households, lease-purchase programs traditionally allow you to rent a home for some preset period of time with a portion of the rental payment going toward the down payment to help purchase the rented property. 

Freddie Mac's newer brand of lease-purchase contracts allow you to make rental payments virtually equal to the mortgage payments you'll eventually pay on a loan you can assume after several years of adequate credit and loan payment behavior. Fannie Mae offers a similar lease purchases product.

Also called "lease-options," the programs often lock in the price of the home at the onset of the contract, making them a questionable deal in a falling market because a buyer could end up paying more than the current market value when it's time to buy. With current forecasts of growing home values, however, it's not surprising lease options today are gaining favor.

Last week, Pulaski County, AK officials and Freddie Mac announced a $43 million lease-purchase program for families with blemished credit, a lack of traditional credit or the lack of down payment funds.

Earlier this year, Freddie Mac and Fairfax County, VA rolled out a similar program for first-time home buyers with similar credit and savings problems. In both cases, after 39 months in the programs, provided the participant makes the required payments on time and has resolved any credit history issues, the buyer takes ownership of the home and assumes the mortgage. 

That allows families to acquire a home three years from now at today's housing prices and with more than three years worth of equity growth.

Freddie Mac's lease-purchase program for low- and moderate-income households earning up to 140 percent of the median income for their area, has been a pilot program in Northern California and Virginia since last year. 

Freddie Mac's program has since spread throughout California and Virginia. A variety of other lease purchase programs -- sometimes involving property investors, new home developers and private lenders -- have cropped up in Denver, New Jersey and other locations.

The programs improve upon the old lease-option contracts typically conducted between private parties with the property owner often benefiting most.

Old vs. new options
Old options typically included a potential buyer, the lessee, who paid the rent to the home owner, the lessor, who wanted to sell the home. Some or all of the rent and sometimes an option fee was held to accumulate the down payment. At the end of the contract, usually for shorter terms of six to 12 months, the lessee had the option to use the down payment toward the purchase of the home for an amount agreed upon at the onset of the contract. 

Considered the Pandora's Box of creative financing, lease options were often a better deal for the lessor, particularly one who had already moved and left the property empty. During the contract, the lessor acquired rent as income which helped dam up any equity drain. If the lessee opted to buy, the lessor reached his or her goal. If the lessee did not exercise the option, something that occurred as often as 80 percent of the time, experts said, the lessor kept the option money and all the rent.

If the buyer couldn't qualify for a loan at the end of the contract, he or she also lost money paid into the option. Keeping up with those lease-option payments was also tough. A lease-option's monthly payment was generally higher than the going rents for identical rental properties because the lease option payment had to cover both the rent, down payment savings and maybe an option fee.

Individual parties in lease-option contracts were also at each other's mercy if a conflict arose as they often did with ill conceived and poorly written contracts that didn't account for numerous unforeseen events.

Freddie Mac's program comes with financial and debt management counseling, which help consumers become financially more capable homeowners, surveys show. But if participants can't hack the newer programs they don't get their money back but they aren't apt to lose as much money as with the older programs.

Under Freddie Mac's lease purchase program, participants typically pay only the first month's rent and an administrative fee equal to 1 percent of the home's cost when the lease begins. That's to cover the cost of any payments they might miss. The "rent" is virtually the same as the monthly mortgage payment, giving the participant the opportunity to experience the burden of a real monthly mortgage. Participants who complete the program also get a market rate mortgage rather than a costly sub-prime loan which might otherwise be the only other financing option for someone with credit problems or small down payments.

In addition to income requirements, participants who were in bankruptcy, must be out of bankruptcy for at least a year, if they had been in foreclosure, at least 12 months mush have elapsed since they lost the house and they can't currently own other real property.

Approved applicants can find their own home and the local administrative agency overseeing the program buys the home and leases it to them.