I am looking to sell my townhouse on a lease option. I have buyer who is ready to put money down.
I just talked with my loan officer who I normally work with (though I haven’t done a lease option in 4 years) and he tells me that since it is a lease option, the exit strategy for the buyer is NOT a refinance for her.
The mortgage broker says that since she will not be on title, there will be no way to refinance her as per my proposed exit strategy.
What am I missing?
Any help on this would be greatly appreciated! Thank you
I believe that your LO is correct. The lease option is set up so that the potential buyer, or optionee, has what is legally referred to as “equitable title” meaning that he/she has only an equitable right to receive legal title at some time in the future if certain conditions are met.
You, as the seller/landlord, or optioner, whose name is on the title of the property in question, retain legal title of the property until the point in time when the renter obtains his/her own mortgage and can buy the property from you and take over legal title. Up until that point in time they do not have legal title.
Since their name is not on your title, they do not have a mortage or property to refi out of. Instead, they should take the rent credits that you have been giving them over the course of the lease-option period and use that money as DP money toward obtaining their own new mortgage. Then they buy the property from you.
Check out this website for more info on lease options.
Several years you would have been able to refi your existing tenant. I had my lender refi a couple of tenants who were purchasing homes from me. What we did was create a “land installment” contract dated the beginning of their leasing term. As long as you had the proper seasoning that the specific lender required, you could then treat the tenants “purchase” as a “refi” since they had an “equitable interest” in the property as shown by the land installment contract.
However, as many investment strategies have been overused/misused resulting in fraud and bank losses, I am told that no banks will do this anymore. You will have to treat this as a straight purchase.