Real Estate Investing

Yesterday I talked about exploring the option of a lease-purchaes for my first home when there were no down payment or seller closing cost assistance programs.  Those days may be returning - and more quickly than you think.

Assistance programs are coming to an end on October 1, 2008 thanks to the Housing and Economic Recovery Act of 2008 which was signed into law last week.  Both lenders and Realtors are expecting a spike in home sales as house hunters rush to buy their homes while they can still get help with down payment assistance and seller-paid-closing programs.

Greg Goodman of Countrywide Home Loans recently wrote that some observers believe these programs exploit a loophole in federal housing lending laws by allowing nonprofit organizations to gift mortgage down payments. 

In some ways, these gifts have become a substitute for subprime loans, in that they give builders a way to place first-tine and low-income buyers into homes even when they can’t afford a down payment.

All is not lost for buyers because there are other programs available.  For example, the Tennessee Housing Development Agency still offers grants to buyers when they complete mortgage counseling coursework.

On the other side of the housing bill, the Feds are granting a $7500 tax credit this year.  This seemingly juicy tax break comes with a price, though.  According to AccountingSolver, the money has to be paid back,

The tax credit has to be repaid 2 years after the purchase. At the tax credit of $7500, the resulting average increase in your tax bill for 15 years will be $500.

I voice my agreement with Miranda at Mortgage News,

Um, wow. Maybe first-time homebuyers would be advised to avoid the tax credit after all, and just focus on the interest rate and property tax benefits that are already offered.

Sometimes you should look a gift horse in the mouth.

The message here is if you’re on the fence about buying and you are already approved for a down payment assistance and / or seller assisted closing cost program, then you need to move now to make it happen.  If you delay too long, you may not be able to purchase after October 1st without having your own money saved - and you’ll need from $7000 upwards depending on the price of your home.

Back in the dark ages when I first started house hunting, I explored the possibility of buying through a lease-purchase option.  I had great credit and a decent income, but very little money saved for down payment.  Because these were the dark ages, there were no down payment assistance programs NOR seller paid closing cost programs.  This is why the American Dream of buying a home seemed so far-fetched and nearly impossible years ago.

When my husband and I met with the builder offering the lease-purchase, he said he needed $2000 down and our monthly payment would be $750.  The $2000 was nonrefundable and of the $750, only $50 of that would be applied to our future downpayment and closing costs.  I was somewhat appalled because I just didn’t understand how so little was applied back to us.

Today, it seems very logical.  When a seller offers to lease-purchase their home they take a big risk in their buyer.  The down payment, in my opinion, should be 5 to 10 percent - not just a thousand or two.  And it should be nonrefundable should the buyer or leasee walk away from the home. 

The seller is essentially taking the home off the market - removing it from another potential buyer for the duration of the lease.  Further if the buyer decides not to buy and damages the home, the seller has the funds available for repair and replacement costs.

A big nonrefundable down payment will also be a disincentive for the buyer to walk away.  It will give a buyer a good reason to follow through on their promise to buy.

The next issue that bothered me was the fact that so little of my “rent” was actually applied back to me.  In hindsight, that was my own personal stupid tax.  Of course the seller is going to keep most of it!  They still have to pay their mortgage every month and the rental amount is applied toward that.  If you lease purchase a home and add extra to the top, then that amount can go toward your down payment or closing costs.

In conclusion, if you are considering a lease purchase be prepared to put a significant amount of money down for deposit and don’t expect your monthly rent to come back to you.  A lease purchase option can be good if you have only about a year of credit repair remaining and if you’re sure you want to own the home once you’ve lived there for a year.

I just caught wind of this movie which - unfortunately - has been released directly to DVD.  With tag lines like, “I damage homes to make them affordable.” how can you miss?

Go here for more information!