Lease Purchase Articles
Mac Makes it Easier for Non-Traditional Borrowers
by Al Heavens
Housing continues to outperform the rest of
the economy, but the lending industry shouldn�t be content
with the status quo.
At least that�s the opinion of Freddie Mac
vice president of community development lending Craig S.
Nickerson, who has outlined a series of initiatives Freddie is
introducing in single-family lending that target minority and
The initiatives include new products, outreach
Why? Minorities � African-Americans, Latinos
and other minority groups, including Asians, will account for
much of the growth in under-age 55 households during this
decade. Whites will still dominate the over 55 segment, but even
there minorities will be well represented, Freddie Mac
In fact, Nickerson said minorities will
account for 65 percent of net household growth during this
decade. Hispanic and Asian household growth will account for the
largest share of that increase, and because they are younger,
minorities will constitute a large part of first-time
Minorities will become the majority of new
homeowners � almost 60 percent of new buyers.
Between 1991 and 2000, an estimated nine
million people from other countries legally immigrated to the
United States, according to the Immigration and Naturalization
Immigration continues to increase, even after
the uncertainties created by the terrorist attacks on Sept. 11,
with nearly 10 million expected arrivals during this decade.
This will account for 27 percent of total household growth
between now and 2010.
Hispanic household growth will be the largest
contributor to this increase, with Mexicans leading the way.
In general, this group represents less wealth
than the traditional homebuying market and their families are
much larger. In the case of people from Mexico, while the
homeownership rate in their native country is 80 percent, only
10 percent of all homes are financed.
In response to the opportunities offered by
this market, Freddie has come with three new products �
Mortgage Solutions for Immigrant Families, Lease Purchase Plus,
which Nickerson calls a �21st century solution to credit and
cash challenges, and Building Down-payment Grants, which is
designed to improve marketability.
What Freddie Mac�s Mortgage Solutions
product has done is to eliminate special requirements for
lending to permanent and nonpermanent resident aliens, Nickerson
said. Borrowers can be non-United States citizens who are lawful
residents. There are no geographic limits on property, which are
owner-occupied and one to two units. There is also a TLTV of 105
percent for purchase and refinance.
Income from boarders can account for up to 30
percent of a qualifying monthly payment. Throughout U.S.
history, new arrivals have rented rooms from more established
fellow countrymen as a way of becoming acclimated to their new
home and to save money to bring relatives to the United States
or send it as support for families back home.
The program allows cash on hand to be
considered a source of funds and credit can be a 12-month
history of non-traditional credit, Nickerson said.
Nickerson calls the 21st Century
Lease-Purchase program both a credit solution and a down payment
solution. Under the program, which is designed to help �no
credit� and credit-impaired borrowers, no down payment is ever
Instead, a three-year lease period is used to
demonstrate financial responsibility. It allows a family to
convert to ownership through the assumption of a mortgage from a
The Building Down-payment component is
designed to improve the marketability of new construction,
Nickerson said. In this program, home builders can contribute to
the down payment on behalf of the buyer that is up to 3 percent
of the home price.
Select lenders are being provided with this
authority. Wells Fargo Home Mortgage is participating in this
program, Nickerson said.
As far as education and outreach is concerned,
Nickerson said that the best way to reach the new buyer is by
thinking out of the box.
One way to increase buyers is by trying to
help people avoid credit problems early in life so the problems
won�t come back to haunt them when they go to by houses. While
it is not impossible for those with a history of late or missed
payments to buy a house, the credit-repair programs offered by
counseling services can delay home purchases by several months
to several years.
So Freddie Mac�s Credit Smart program is
designed to help people learn how to handle credit from the
Freddie Mac is trying to use non-traditional
methods of reaching the minority buyer, for example, through
McDonald�s, and through consumer-oriented Web content.
Nickerson said Freddie also is acting to fight predatory lending
as a way to preserve homeownership.
New technology solutions introduced by Freddie
Mac include enhancement of Loan Prospector, which have increased
borrower acceptance, and CounselorMax, a new counseling
management tool, Nickerson said.
Mac Tries Lease-To-Own Program
by M. Anthony Carr
I've seen a lot of "unique"
financing programs come across my desk and most of them were
simply warmed over and repackaged programs that have been on the
market for quite a while. But not since the introduction of 100
percent financing have I gotten as excited about a mortgage
product than one I saw this week from Freddie
Home Sweet Home Virginia is a new type
of program that promises to become a nationwide product for
Freddie Mac as partners line up with the proper support and
funding. Basically, it's a lease-to-purchase program that helps
low- to moderate-income buyers or purchasers with credit
problems get into a house by first renting it and then
converting the lease into a purchase.
Now, this isn't a new way of financing a house
-- owners have been offering lease-to-purchase offerings for
years. However, this is the first time a national money source
-- Freddie Mac -- has lined up with other national partners to
create such a program buyers can use for either a new home or
existing house purchase.
Freddie Mac launched a similar $90 million
program in California in September, 2001. Freddie Mac
spokesperson Brad German says the program works well with
housing agencies that have bond-issuing authority.
The original funds for these programs come
from the issuance of bonds. The housing agency then works with
the at-risk homebuyer to get him or her into the target
property. Once they fulfill the 39-month lease, the deed and
mortgage is then transferred over to the purchaser and Freddie
Mac buys the loan on the secondary market, thus replenishing the
funds for future purchasers.
The new program is "designed to help
families with blemished credit, a lack of traditional credit, or
a lack of funds for a downpayment to move into a new or existing
home," according to Freddie Mac. All potential borrowers
must participate in a borrower-counseling program provided by
HOPE International, Inc.
The program is available from local housing
agencies who can issue bonds to raise the initial funds. The
Home Sweet Home, Virginia initiative is available to households
who earn up to 140 percent of the area median income ($119,400
for a family of four) and meet the initiative's minimum
underwriting requirements. To qualify, Lease-Purchasers must
agree to complete the borrower pre- and post-purchase counseling
program offered through H.O.P.E International.
The Virginia program will start in high-priced
Fairfax County where new single family houses sell for more than
$525,000 and new townhouses tip the pricing chart at
$300,000-plus. This is to target homebuyers who are caught in
escalating priced areas where generally only higher income
purchasers can afford to buy in the area.
Interestingly, the initiative is coming from
all over the state, but targeted at a few jurisdictions. The
Harrisonburg Redevelopment and Housing Authority, based in the
western part of Virginia, is issuing the bonds, but it's helping
buyers across the Old Dominion. HOPE International, a nonprofit
housing agency located in the Washington, D.C. suburbs, handles
the mortgage applications while First Financial Equity and other
lenders will provide the mortgages.
Neither the California nor Virginia program
requires a downpayment, however, the purchaser must pay a
commitment fee equal to 1 percent of the home's purchase price.
Once the purchaser assumes the mortgage other costs associated
with the purchase and loan assumption must also come from the
Freddie Mac has a good program here and
hopefully housing agencies across the country will get on board.
Housing agencies interested in forming a lease-purchase program
should contact Freddie Mac at 703/903-2437 for details.
(Virginia buyers can call 703/267-5673 for
application information. California residents can get more
information on the East
Bay-Delta Lease-Purchase Program web site or by calling
Take Aim at Minority Buyers
by Lew Sichelman
With three out of every five first-time home
buyers expected to be racial and ethnic minorities over the
remainder of the decade, major suppliers of mortgage money are
rolling out new products at a rapid pace so lenders can meet
their borrower's needs.
Freddie Mac is eliminating a rule that
requires borrowers to be U.S. citizens and is offering an
improved version of the old lease-purchase program. Meanwhile,
Fannie Mae is in the market with an interest-only loan that can
save a buyer with a $150,000 mortgage almost $100 a month.
"We're entering an era of mass
customization to meet the needs of underserved markets,"
Fannie Mae Chairman Franklin Raines said at the National
Association of Home Builders' annual convention here last week.
"There will be a lot of ways to reach
this new constituency," added Craig Nickerson, vice
president of community lending at Freddie Mac.
Freddie Mac and Fannie Mae don't loan money
directly to consumers. Rather, the two federally chartered
financial institutions keep the funds flowing by purchasing
mortgages made by local lenders and packaging them into
securities that are sold to investors worldwide.
Nickerson told the convention that nearly 60
percent of all first-time buyers between now and 2010 will be
young minorities and immigrants.
Nearly 80,000 builders and allied
professionals attended the huge event, which spilled out into
the parking lots of the World Congress Center at the top of
Hispanic and Asian households will account for
the largest share of the growth, according to Nickerson, as 27
percent of total household growth in the decade will come from
immigration. Most of the Hispanics are expected to come from
To reach permanent and non-resident aliens,
Freddie Mac no longer demands that borrower be American
citizens. Now, anyone who is a lawful resident of this country
is eligible for a mortgage.
In addition, geographic restrictions on
owner-occupied, one and two-family units have been removed.
"We're changing our underwriting across the board, not just
in certain areas," Nickerson said.
Freddie Mac also will now lend up to 105
percent of the value of the property, accept cash-on-hand
(sometimes known as "mattress money") as a source of
funds, and allow borrowers to use money from boarders as part of
the income needed to qualify for the mortgage.
For credit-impaired borrowers with little or
no cash, the company is improving on the old lease-purchase
scheme by giving home buyers full credit for the monthly
payments and allowing them to reap all the benefit of
Freddie's 21st Century Lease Purchase program
is both a credit and a downpayment solution, Nickerson said.
"No downpayment is required, ever," he said. "And
it helps borrowers who have serious credit issues or no credit
Under the program, a non-profit organization
buys the house and leases it to the future owner at a rent
that's close to the agency's mortgage payment. Then, after three
years, the tenant assumes the mortgage as a 27-year loan and is
credited with all equity that has accrued through appreciation
and paying down the loan.
The lease-purchase loan is available now only
in California and parts of Virginia, but the company plans to
expand coverage nationally over the next two years.
For the first time, Freddie Mac also is
allowing builders to contribute up to the 3 percent of the
purchase price on behalf of a buyer. The company is still
"not real comfortable" with permitting sellers to put
up money for their buyers, but Nickerson said it is now willing
to treat a grant from the builder as borrower cash.
Meanwhile, Fannie Mae has a new and innovative
interest-only mortgage that allows home buyers to expand their
With the InterestFirst Mortgage, borrowers pay
just the interest for the first 15 years of the mortgage,
reported Howard Nelson, vice president of customization.
On a $150,000 mortgage at 7.125 percent, the
buyer's payment would be $95 a month lower than it would be on a
30-year fixed loan of the same amount at 6.875 percent. But if
the borrower decided to make a payment to principal, the next
month's payment would be even lower.
As the loan amount increases, Nelson said, the
savings would be even more significant: $126 on a $200,000
mortgage, $158 on a $250,000 loan and $190 on a $300,000
The Right Numbers With A Lease/Purchase Agreement
by David Reed
In last week's column, you read about the
benefits and risks of owner-financed transactions from the
seller's point of view. This week we'll examine how to structure
an owner-finance offer from a buyer's perspective and some tips
on successful lease-purchase arrangements.
Who needs seller financing? Most people think
that it's for those who have damaged credit, or could not
otherwise obtain conventional financing. That may be the case,
and if indeed you have some credit issues that require seller
financing, be prepared for the following terms.
If you simply have scattered consumer late
payments (credit cards and installment debt), say more than 10
over the past 2 years, a lender may offer a mortgage rate 2 to 3
percent above market rates. Today, that would result in a
mortgage rates of 8.5 to 10 percent. If you also have late
rental payments, expect an even bigger hit.
However, there's a lot to be said for
potential home buyers who have had late payments on other items
but kept their sacred rental payment on time, every time. That
can say a lot when it comes to explaining to a potential seller
that "yes, there were some bad times, but we always paid
our rent on time!" Be prepared to provide the seller both
your rental agreement along with 12 months worth of canceled
checks showing timely payment.
By being up-front about credit issues and
demonstrating that negative items were due to a particular
event, such as illness, loss of job or other catastrophe will go
a long way -- especially if your rent was always paid on time.
Another plus...if your new house payment is close to your rental
payment you can make a case that you've established the fact
that you can afford your new home, just as you afforded your
But if your credit is excellent, why would you
ever need owner financing? Sometimes the property itself is a
concern, regardless of who the buyer is.
When a lender issues a mortgage loan, the
lender attempts to justify the sales price by looking at
similarly priced houses of similar size in the immediate area.
Sometimes this doesn't happen because the structure is unique,
say a log cabin, A-frame or geodesic home. Or, comparables may
be difficult for a property located in a secluded area miles and
miles from like structures or recent sales. If this is the case,
then you may want to make a purchase offer with the seller
financing all or most of the mortgage.
Would an offer with seller financing be
attractive to an owner? No always. But what if financing from a
conventional lender is unavailable and a buyer with cash is not
to be found? In such circumstances, an owner
"take-back" may be attractive.
If you can find a seller who will provide part
of the financing, then lenders may be more easily convinced to
provide either a first or second mortgage on such unique
properties. Between financing from the owner and a loan from a
lender, you'll need fewer dollars from your bank account.
Lease purchase plans can be a good idea for
selected buyers who don't have enough money down for a
conventional loan or who need some time to both save money and
A lease purchase is an agreement between a
buyer and owner under which the owner gets rent and the buyer
has the right to purchase the property at a given price by a
certain date. Lease purchases can be attractive for both buyer
and seller, but the financing with many lease purchases is set
up incorrectly, making them difficult to finance at the end of
the lease period. To avoid the big pitfalls, follow these steps:
- If part of the rent payment is to be set
aside each month for a future down payment, the owner must
agree not to commingle the funds. In other words, the seller
should establish an "escrow" account specifically
for your money. That way, when an underwriter reviews your
loan application, there is no doubt as to whose money
belongs to whom.
- Is part of your monthly rent also going
toward the downpayment? If yes, then the monthly payment
must include your lease payment PLUS your extra money. Only
funds above market rent may be included in your savings
What's the "market rent?" It's an
amount determined by having an appraiser perform a market
rent analysis at time of contract. Why? If you don't pay
above and beyond market rent, then the seller is in effect
"giving" you down payment money. While there may be
exceptions, in the general case a conventional lender will only
credit monthly rental funds to your downpayment if they are
above the market rent.
A clean, no-questions-asked lease/purchase
agreement could work like this: If the market rent in your area
is $500 per month and you want $100 each month to go toward the
down payment at the end of your lease, then your total payment
would be $600 per month. Of this amount, the seller should put
your extra $100 in an escrow account. Structured this way, you
won't have a "savings surprise" when it's time to buy
your new home.
The rules relating to lease purchase
agreements vary by jurisdiction and such agreements can be
complex. Both buyers and sellers are best served by each having
an attorney review such agreements before either party signs and
also by speaking with brokers and lenders.
Signs Of A Market Shift:
Are They In Your Neighborhood? (Part I)
by Julie Garton-Good
It begins with subtle changes, some so minor
that unless you were keeping close track, you wouldn't notice.
But over time, there are a handful of ways to determine if the
residential real estate market in your area is softening.
Properties Take Longer To Sell
You may not know how long it's taking the
median-priced home to sell in your area. But you may notice that
for-sale signs stay up longer and often go through one or two
"sale pending" sign riders before the sign is removed
from the property. It's not uncommon in weakening markets for
sale times to extend by weeks or even months longer than in a
brisk market. Your best source of information for your
neighborhood is an agent who specializes in selling homes there
and compiles data from the local Multiple Listing Service (MLS).
Additionally, if an agent is very up-to-date
on market information, he or she should be able to provide
information about the for-sale-by-owner properties. Even though
not reported in MLS, FSBOs are often first to feel the crunch of
a contracting market.
More Properties For Sale
It might have seemed like yesterday when there
was a property shortage in your neighborhood and sellers were
king! But additional inventory, especially during prime-time
selling season, may indicate that too few buyers are buying
and/or that sellers need to be more realistic about the
prices they're seeking.
For example, prices in a softening market
often need to be adjusted on a bi-weekly basis to stay on a par
with properties that are selling. A seller who's not amenable to
adjustments in listing price, terms, or incentives offered to
buyers may find prospects few and far between as the market
The final blow comes when a prospect makes
what the seller considers to be an "insulting offer"
only to later learn that it was reasonable for market conditions
and, unfortunately, the only offer she received.
For-sale-by-owner property -- FSBOs -- tend to
be in full bloom during two types of real estate markets -- good
and not so good. Why? The former is due to the fact that in a
strong seller's market, there are often armies of qualified
buyers and only a small number of properties available. That
means that unless the FSBO is totally unreasonable in price
and/or other conditions of the sale, even the marginally
knowledgeable or ill-prepared seller will eventually get lucky
and find a buyer.
In addition to good times, consider that when
a previously-strong seller's market ebbs, FSBOs spring up like
flowers after a spring rain. This is usually caused due to:
- The seller's belief that the house will be
more financially attractive to buyers if the sales
commission is eliminated which could, in turn, drop the
- A real estate agent's unsuccessful try at
marketing the house, so the anxious seller tries to sell it
In the next and final installment of this
article, we'll explore two additional indicators that can signal
a down turn, perhaps even a bumpy landing for your real estate
market -- an increase in delinquent loans and foreclosures,
coupled with contract terms that appear too good to be true.
In our next installment, we'll examine three
additional subtle signals in your neighborhood that can indicate
a market shift and softening prices.
Signs of a Market Shift:
Are They Present In Your Neighborhood? Part II
by Julie Garton-Good
Unless you currently have your home listed or
are thinking of putting it on the market, it may not matter to
you that signs of a softer real estate market are quietly
seeping into your neighborhood. But it should, because even if
you are not moving you ability to refinance or get a home equity
loan may be impacted.
Take a look in your neighborhood. Are there
more properties for sale than usual? What about the homes that
have recently sold? Did they take longer to sell than in the
past and if so, what concessions did sellers have to make to
attract a buyer and make the sale?
But a softening real estate market is much
more than fewer sales. The initial economic crunch starts with
individual home owners who:
- Are late paying their mortgage or miss
payments entirely. First hit are owners with mortgage
payments high in proportion to their monthly income,
especially those with low or no savings to bridge a
shortfall if a paycheck is missed or overtime shrinks. In
times of economic downturn, many home owners find that
they're dangerously one pay check away from foreclosure;
- Find it tough if not impossible to bring
delinquent payments current in order to save the property
from foreclosure. As tough as it was to accumulate the down
payment and closing costs for the initial home purchase,
catching up hundreds if not thousands of dollars within a
several-month time period may be impossible for many owners.
The evidence then appears---yard signs declaring that HUD
and other entities in the secondary market (like Fannie
Mae are focused on recycling lender "REOs"
(real estate-owned repossessions).
Once lenders find that defaulting loans are
growing, they too become strong competition in order to move
these non-performing assets off the negative side of their
balance sheet into the "performing asset" category.
Strong competition with lower interest rates and fewer closing
costs attempt to lure what few buyers there are to these
With all the competition in a market turning
the focus from seller to buyer, one would think that bargains
could abound for the patient, strategizing buyer. Unfortunately,
all that glitters might not be gold. Sellers can offer terms too
good to be true like low down payments (but high monthly
costs), take over mortgage (because the property was
bought with little or nothing down the remaining loan balance is
worth more than the home), or lease purchase to grow your
down payment gradually (but if you miss a payment the
property can be reclaimed by the owner under some installment
The bottom line is that debt is still debt, no
matter how flashy the terms sound. Low or no equity build-up
coupled with first, second, and often third mortgages may tie
some seller's hands, making any sale impossible unless the
seller brings a check to closing. Of course, if the seller has
the cash for a check, in many cases they wouldn't need to sell
in the first place.
Prudent home owners and buyers alike know that
a market shift is a time to weigh options carefully, not
over-extend, and to gather all the facts prior to making any
type of move even if it initially appears to be a positive one.
Since there is no crystal ball to determine how deep, wide and
long a shifting real estate market can be, we must rely on the
time-tested strategies that have brought us this far---market
trends, information, and a whole lot of common sense.
House Hasn't Sold? Lease Purchase May Be the Answer
by Julie Garton-Good
You're running out of time. The house hasn't sold and you need
to be at your new job in less than one month. Should you lower
the price? Rent the house? Instead, try lease purchase terms to
entice a buyer!
though a lease purchase is often confused with a lease option,
it's entirely different. A
lease purchase is a true sale, but with a delayed but
predetermined closing date often six months or more in the
future. It works well when a seller needs to move but the
house hasn't sold. It can also accommodate an otherwise strong
buyer who needs time for their house to sell or to accumulate
additional time on the job in order to qualify for a mortgage
As with any sale, a purchase agreement is
drafted and an earnest money deposit is taken. Should the buyer
not close the purchase, any and all of the default provisions
listed in the purchase agreement would apply (including loss of
earnest money deposit). Since the buyer will occupy the house
prior to closing, it's wise to obtain as much earnest money as
possible. It serves as a motivator to close the sale and can
help cover property repairs required prior to closing.
You need to determine how much you'd charge a
buyer in monthly lease payments until closing. This can be just
enough to cover your current mortgage payment, what similar
properties like yours are renting for or equal to what the
buyer's new payment will be once the sale is closed (another
great motivator for the buyer to close!). Often in a
lease purchase the seller will allow a certain amount of
the buyer's monthly lease payment apply to lowering the sales
price of the property or go to closing costs.
While it's a great incentive to attract a
buyer, but make sure that the buyer double checks with the
lender to ensure that monthly credits can apply under the
financing program he's seeking. Viewed as buyer incentives under
some loan programs, the amount allowed may be capped or
Even though you're anxious to move, make sure
that you (and ideally, a third party like a real estate agent)
walk through the property with the buyer prior to his occupancy.
Note the condition of the flooring, carpeting, and walls as well
as the general condition of the home's exterior and yard. Also
note any appliance or fixture that isn't working. Present a copy
of your inspection notes to the buyer as well and have him
concur by signing both copies. The walk-through will serve as a
benchmark of the property's condition at the time you vacated
and won't allow the buyer to later claim he wasn't informed
about the condition of the house.
One last caution when using a lease purchase.
Before you accept the contract, make sure that the buyer is
pre-approved for the mortgage he needs to obtain. You'll also
want the real estate agent and the lender to quote you the
approximate amount of closing costs you can expect to pay at
closing. Even though a lease purchase can sidestep having to
rent the house, saddling yourself with a marginal buyer who
can't qualify for financing could prove far worse (and more time
consuming) in the long run.