A lease purchase or lease to own is a legal contract between the owner of a property and a third party to lease real estate or property from him. A lease purchase involves the payment of a down payment or closing costs by the lessee of a house to be leased. A lease purchase also comes with a lease agreement, the legal portion of the contract. The lease agreement usually includes the terms and conditions of a lease, including the rent amount and the date of termination, repairs, disclaimers, and other special terms applicable to the case.
The lease-purchase arrangement can be advantageous for both the lender and the lessee. The lender pays less interest on the monthly payments than in a normal mortgage loan. However, if the borrower defaults on the contract, he must pay the full amount to the landlord. This gives both the borrower and the landlord an extra source of income.
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For the lender, a lease purchase offers the opportunity to earn a profit on a mortgage loan that is higher than the interest rate applied to the original mortgage. The lessee has the option of purchasing the home at the end of his lease if he feels that he is in danger of defaulting on his contract.
The advantage to the lessee is that he does not have to sign a separate contract to purchase the home. All the clauses of the original contract are included in the new contract. Thus, it is easier for the borrower to understand and accept the contract. If the borrower decides to sell his home before the contract ends, he has to close on a new purchase contract. Otherwise, he must pay all fees and charges associated with the first contract.
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As previously mentioned, the advantage to the lender is that he makes more money from a lease-purchase arrangement. The lessor does not have to pay the difference between the interest rates and the cash down payment required by the lessee. If the lessee defaults on his contract, he only has to make one payment to the lender rather than two or three, plus his closing costs.
In some cases, a lease purchase can be a good deal for both parties because both parties will have the ability to own the home without having to leave their homes. This type of arrangement can be beneficial because the lessee may decide to sell the home in a short period of time. He may also be able to buy another home in the future and resell it at a lower price than the original contract.
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In this instance, a lease purchase can be useful to the lender because he does not need to take a mortgage on the home. However, he still needs to make a down payment if the lessee decides to buy the home at a later date. Otherwise, he will have to pay the down payment to the lender and the bank or lending institution.
In some cases, it is necessary for the bank to purchase the home before the buyer purchases it because he will need the money to cover the closing costs of the home and other expenses incurred before making the closing on the contract. A third party such as a lawyer can sometimes help a lender in negotiating for the right to buy a home with a lessor. Even though the contract does not require that a lender to buy a house before he sells a house, he may be interested in a lower price when negotiating a lease-purchase arrangement.
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