In my previous article, “8 Tips To Lease Purchase Your Dream Home”, I outlined 8 tips for the prospective homeowner to think about when considering owning his own home. I want to expand on each of these points to provide you with more information in order to be better informed and be in a better position when considering using a lease purchase to get into a home of your own.

So having said that let’s discuss “Easy Down Payment (Option Fee) Guidelines” since having a down payment (option fee) will be necessary to get into a home as a prospective homeowner.

Lease Option Down Payment Guidelines: What You Need to Know

Lease option down payment guidelines can be a complex topic for both buyers and sellers. A lease option is a type of agreement where a buyer has the option to purchase a property after a set period of time, usually one to three years.

During this time, the buyer will typically make monthly payments to the seller, part of which goes towards the down payment on the property.

The amount of the down payment required for a lease option can vary depending on the seller’s preferences and the buyer’s financial situation. Some sellers may require a larger down payment upfront, while others may be more flexible and allow the buyer to make smaller payments over time.

It’s important for buyers to understand the down payment guidelines for a lease option before entering into an agreement, as this can have a significant impact on their finances.

Understanding Lease Option

A lease option is a real estate contract that allows a tenant to lease a property with the option to purchase it at the end of the lease term. This type of agreement is also known as a rent-to-own or lease-purchase agreement.

It is a popular option for people who want to own a home but may not have the money for a down payment or have poor credit.

In a lease option agreement, the tenant pays a non-refundable option fee to the landlord to secure the right to purchase the property at a later date. The option fee is usually between 2% and 5% of the purchase price and is credited towards the down payment if the tenant decides to exercise the option to buy.

The lease option contract typically includes the following terms:

• Purchase price: The price at which the tenant can buy the property at the end of the lease term.
• Lease term: The length of time the tenant will lease the property before deciding whether to exercise the option to purchase.
• Option fee: The amount paid by the tenant to secure the right to purchase the property at a later date.
• Rent: The monthly rent paid by the tenant during the lease term.
• Maintenance responsibilities: The responsibilities of the tenant and the landlord for maintaining the property during the lease term.
• Default: The consequences if the tenant fails to pay rent or decides not to exercise the option to purchase.

Lease options can be a win-win situation for both the tenant and the landlord. The tenant gets the opportunity to live in the property and potentially become a homeowner, while the landlord earns rental income and has a potential buyer for the property.

However, it is important to carefully review and understand the terms of the lease option contract before signing it.

Role of Parties Involved

Role of Tenant

In a lease option agreement, the tenant has the option to purchase the property at the end of the lease term. The tenant is required to make a down payment (option fee), which is typically less than the traditional down payment required when purchasing a property.

The tenant also pays a monthly rent, which is usually higher than the market rent, since a lease purchase is a type of owner financing and will support a higher rent.

The tenant must ensure that they are able to afford the monthly rent and the down payment, as failure to make payments can result in the loss of the option to purchase the property.

Role of Property Owner

The property owner in a lease option agreement is the seller of the property. The owner receives a down payment from the tenant, which is typically less than the traditional down payment required when selling a property. The owner also receives a higher monthly rent, since he is offering the property with terms that make it easier for the tenant/buyer to get into the home and buy it at a later date.

He must ensure that the property systems, the home’s structure, electrical, plumbing, heating, A/C, etc are in good condition when the lease is signed and provide a 30-day guarantee of their operation.

The tenant/buyer will also have some responsibility for maintenance and minor repairs during the lease term, however. If the property owner does not do his part by maintaining the property, the tenant may choose not to exercise their option to purchase it.

In addition, the property owner must ensure that the lease option agreement is legally binding and enforceable.

Rent Credit and Down Payment ideas

Rent credit is a portion of the monthly payment that is applied toward the eventual purchase of the property. However, the common practice today is to offer the tenant/buyer a “concession”  which would be a credit given at the closing to help the tenant/buyer with his closing costs,  

The rent credit amount can vary and should be agreed upon by both parties before signing the lease option agreement.

You can click this link to download and print out a copy of the 10 points mentioned below as a handy chart for future reference.

1. Establish a savings goal: Determine how much you need for a down payment and set a specific savings target. Consider factors such as the price range of the homes you’re interested in and the percentage of the purchase price required for a down payment (usually between 2% and 5%).
2. Create a budget: Review your income and expenses to identify areas where you can cut back and save more. Allocate a portion of your income specifically for your down payment savings and track your progress regularly.
3. Automate your savings: Set up an automatic transfer from your checking account to a dedicated savings account each month. This way, a portion of your income will be consistently allocated to your down payment fund without you having to remember to do it manually.
4. Reduce unnecessary expenses: Look for ways to cut back on discretionary spending. This could involve reducing dining out, entertainment costs, subscriptions, or any other non-essential expenses. Redirect the money saved towards your down payment fund.
5. Increase your income: Explore opportunities to boost your income. This could involve taking on a side job or freelance work, negotiating a raise at your current job, or starting a small business. The additional income can be directly allocated to your down payment savings.
6. Save windfalls and tax refunds: Whenever you receive unexpected or extra money, such as work bonuses, tax refunds, or cash gifts, resist the temptation to spend it impulsively. Instead, deposit these funds directly into your down payment savings account.
7. Cut down on housing costs: If feasible, consider downsizing to a less expensive rental or finding a roommate to split housing costs. Alternatively, negotiate a lower rent with your landlord to free up more money for savings.
8. Explore down payment assistance programs: Research if there are any local or national down payment assistance programs available in your area. These programs can provide grants, loans, or other financial assistance specifically for down payments.
9. Monitor your credit: Maintain good credit hygiene by paying bills on time, keeping credit card balances low, and avoiding taking on excessive debt. A good credit score can help you qualify for more favorable mortgage terms when you are ready to purchase the home, potentially saving you money in the long run.

Remember, saving for a down payment requires discipline and commitment. It may take time, but with careful planning and consistent savings habits, you’ll be on your way to achieving your goal of buying a house.

I’m real estate investor, self-improvement coach, author, and publisher, Don Mayer. I would love to connect further with you to help you achieve your goals. If you are interested in learning more about lease purchasing a home, please take a look at my entry-level rent-to-own guide, “The Ultimate Home-Finder’s Workbook”, and consider coming aboard and learning the steps to moving into a home of your own!