You often read about how to profit by offering lease option. A current effective method is using the sandwich lease option to take control of a property and sell it without ever actually owning the property. But plenty of investors have rentals or even vacancies that they want to sell in today’s market when financing is difficult. Back in July of 2010, selling on a lease option became a benefit for sellers that you can use for marketing purposes.
As of July 2010, Fannie Mae established a policy shortening the length of time to qualify for a new mortgage after having a short sale or deed in lieu of foreclosure. It’s a complex matrix of options but under the best circumstances, a buyer qualifies for a new Fannie Mae loan at 90% of the mortgage value after 2 years if they have extenuating circumstances such as a job loss. Without extenuating circumstances, they qualify for an 80% LTV after 2 years. This means there are plenty of people that can get a loan but don’t realize it.
You can view the entire matrix at: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/sel1005.pdf
One word of warning, the shortened qualifying time does not apply to those going all the way through the foreclosure process.
Using a combination of programs can put buyers into a position to take out a lease option to begin building equity in a home today, even if they recently had a negative event on their credit rating.
When these same people avail themselves of the Obama Home Affordable Foreclosure Alternative Program (HAFA), they are eligible for up to $3,000 in moving expenses. This combination makes them great candidates to purchase a home using a lease option. If lease option purchasers apply $2,000 of the assistance money when purchasing a $100,000 house, they are making a 2% down payment. This becomes the option purchase price. A little light for a traditional lease option arrangement but it is non-refundable.
Qualifying for a 90% LTV Fannie Mae mortgage in two years means they need to have a $10,000 down payment in two years. At 6% interest, they will have a $588 mortgage payment on the loan. If you add another $150 per month to cover taxes, insurance, etc. they will have a $738 monthly payment. If they can afford this payment, they will qualify for a Fannie Mae backed loan at the end of two years.
Using $738 as a beginning point, you can calculate how much more to add to the monthly lease to assure they have the 10% down to qualify for a Fannie Mae. Over the next two years, they need another $8,000 ($10,000 – $2,000) to cover the down payment. The $8,000 divided by 24 months comes to $334 per month (rounding numbers to keep the math simple. This means if they can afford a $1,072 monthly payment, a lease option will work for you and them.
Of course, flexibility is one of the great things about using a lease option to buy or sell a house. If you have a buyer not able to afford a lease option at that price, you can extend the option period out another year. You can do the same thing if they can’t come up with the full $2,000 down payment.
If they only qualify for the 80% LTV loan, you can be very generous by signing a five-year option to cover the $20,000 down payment they will need. You’ll be collecting substantially above market rent even if they don’t exercise the option. The five-year version works for buyers that have gone all the way through the foreclosure process because after five years is when they again qualify for a Fannie Mae loan.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.