How Is a Lease Used As a Financing Vehicle?
A financing vehicle is a tool, program or arrangement that allows an individual to secure financing. By this definition, a rental lease can be a financing vehicle when the individual establishes a lease-to-own arrangement.
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Lease-to-Own Arrangement
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A lease-to-own arrangement is between a homeowner or landlord and an individual who needs a place to live. The renter can live at the home for a set period of time then exercise an option to buy the home if he wishes. The landlord sets the purchase price at lease signing. To establish a lease-to-own agreement, the renter must pay an option fee at the beginning of the lease. In many cases, part of his monthly lease payments goes toward the purchase price.
Monthly Payments
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On-time monthly lease payments are key to establishing the individual's creditworthiness so that she can secure financing for the home. Some mortgage lenders may take the history of on-time lease payments to the landlord into account when deciding on whether to approve a home loan. The tenant must get a rent receipt from the landlord each month to prove on-time payments or agree to have her payment automatically drafted from a checking account. She can then show this proof to a mortgage lender to increase chance of approval.
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Landlord Reporting
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In some cases the landlord who plans to rent the home with the option to buy can also report the individual's on-time payment history to credit bureaus. If the renter continues making his payments as agreed and the landlord reports the information to credit reporting agencies, that can help boost his credit score and increase his chances of getting financing.
Option Payments
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Another key element of securing home financing is having the required down payment for the home. When an individual makes rent payments in a standard lease-to-own agreement, part of that payment goes toward a credit for purchasing the home in the future. So this is another way that leasing can act as a vehicle for helping an individual achieve home financing goals.
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