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Nov 16

Lease Option Failures

Three different Realtors called me this week chatting about deals gone south.  Each agent had a story where in a large amount of money was forfeited by the “Buyer.”  The three incidents had combined losses of $60,000!  All of the deals were lease options.

Each of the tenant/buyers entered into the lease option because they did not qualify for traditional mortgage financing.  They had large chunks of cash for non-refundable deposits but did not meet the credit guidelines for a regular mortgage.

They did what I call a work-around, trying to work around the rules that actually protect them.  I believe most buyers that have an issue ask a mortgage professional how long it will take before they are eligible for a mortgage.  The loan officer gives them the only answer they can which is a minimum timeline.

For example if the borrower recently filed bankruptcy then the minimum timeline might be 2 or three years from the date of discharge depending on the type of loan they get.  That is the best case scenario!

But that is not how the loan is going to be underwritten once the minimum waiting period is over.  The question is asked, “How long after a bankruptcy must I wait until I can get a mortgage?”

But the 2 or 3 year answer only addresses the minimum timeline; nothing in the field of mortgage financing is that simple.  For instance, if the BK included an FHA mortgage and FHA ended up taking the property back from the lender the timeline isn’t based on the BK discharge.  It is based on when FHA paid off the lender and that may not be until years after the BK was discharged.

The borrower thinks they can get another FHA loan 2 years after the BK was discharged because that is the minimum timeline for getting an FHA loan.  But they cannot get approved for another FHA loan until they are eligible for a new CAVIRS number.

This additional $60,000 lost by buyers this week puts the total I have heard about this year in the neighborhood of half a million dollars.  That’s a pile of money!

If you insist on trying to work-around the rules, establish the timeline you think is required then double it.  Double the amount is probably more realistic.

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