- The Washington Times - Wednesday, September 20, 2006

An apparent resurgence in lease-to-own programs is helping renters improve their credit or accumulate the cash needed for down payment and closing costs to buy a home. In recent years, a variety of lending programs have been created that allow purchasers to buy a house with little or no down payment. Government programs have been established to help low- and moderate-income buyers with down-payment money. These two types of programs have made achieving the goal of homeownership easier for some buyers, lessening their need of a lease-to-own arrangement.

But potential buyers with credit problems might find a lease-to-own program the boost they need to improve their credit score and work toward the purchase of a home.

The Federal Home Loan Mortgage Corp. (Freddie Mac) sponsored the Lease Purchase Plus program in September 2001, working with local housing agencies and nonprofit corporations to allow low- and moderate-income buyers to purchase a home without the need of a large down payment.

The program, designed to make homeownership easier for consumers without a traditional credit record or those with impaired credit, requires a local agency to purchase a home, with the buyer assuming the loan on the property within three years.

During the lease phase, the buyers participate in a homeownership program and work to improve their credit score by making all rental payments for the home on time.

Anne Arundel County launched its Key Choices program on June 1, says Linda Gray, director of home ownership for the Housing Commission of Anne Arundel County.

“We conducted a study in 2005 which showed that the majority of people who were turned down for a mortgage loan were rejected because of a poor credit score,” Mrs. Gray says. “We felt strongly that a lease-to-purchase program is a good way to help folks with credit issues and a lack of funds for a down payment and closing costs.”

The Key Choices program requires applicants to live or work in Anne Arundel County and to want to purchase a home in the county. The program, restricted to buyers with low to moderate incomes, requires a stable income.

Clients meet with a lender to determine the maximum purchase price they can afford. They cannot currently own property, although they do not have to be first-time home buyers.

“There’s no minimum credit score required, but if the client has a score of 580 or lower they will need to provide 12 months of on-time rental payments in order to be accepted into the program,” Mrs. Gray says. “Buyers with low credit scores are also required to meet with a credit counselor.”

All Key Choices clients pay a 1 percent commitment fee when a home is purchased for them, but no down payment or closing costs are required.

The Anne Arundel Housing Commission purchases the home and rents it to the client for two to three years, during which the clients work to raise their credit score to a minimum of 620, pay their rent on time for at least 24 months and attend a home buyer’s class.

At the end of the lease period, the clients assume the mortgage loan at the same interest rate the Housing Commission has been paying.

“The benefits to clients are that they can earn a better credit score, show they can make payments on time and, when they take over the loan, earn the tax break given to homeowners,” Mrs. Gray says. “If equity has built up in the home over the years since the purchase, that equity belongs to the homeowners.”

Mrs. Gray says 128 persons have applied for the program since June 1. Their applications are being processed. She says she assumes that a high percentage of the applicants will be accepted to begin the program.

While the Anne Arundel program has garnered attention and interest, not all lease-to-own programs have been as successful.

Freddie Mac spokeswoman Patricia Boerger says, “Freddie Mac is phasing out our emphasis on the Lease Purchase Plus program because we haven’t had a big response to the program. We typically contribute to nonprofit groups, which provide home ownership counseling programs, so we intend to rely more on that path to educate consumers and encourage homeownership.”

Miss Boerger offered one reason for the slow response: The program can be very complicated for lenders.

In addition, she says, “Today a 20 percent down payment is no longer standard. Down payment assistance is available for buyers along with a variety of mortgage products designed for a low down payment or none at all. There’s so much more education now, too, for credit-challenged people.”

Miss Boerger recommends that potential buyers interested in a lease-to-own program contact a lender, a nonprofit housing counseling agency, and state and local housing offices for information.

KSI Services Inc., developers of apartments, condominiums and planned communities in the Washington area, introduced its own lease-to-buy program on Jan. 1. The KSI program credits renters in KSI apartments with money toward the purchase of a KSI condominium in the future.

“We started this program because we saw it as a perfect fit,” says Karen Kossow, assistant vice president of sales and marketing for KSI Management Corp.

“We always have renters who want to be purchasers, and this keeps them in the KSI family,” she says. “Every single resident in our apartments is already part of the program, and they are all automatically enrolled. Anyone already living there as of January 1 started earning credits that month, and anyone who has moved in since then gets credits beginning in the month they move in.”

KSI’s only requirement for earning credits is that the renters have maintained good standing in paying their rent. Each apartment then earns $250 per month toward the purchase of a KSI condominium. The $250 per month credit accrues to a total of $5,000 in credits.

The credits are available to use toward the purchase of a condominium during the entire time they are residents in a KSI apartment and up to 60 days after they are no longer residents there. Once the residents have reached the $5,000 limit, they can wait as long as they want to use the credit toward the purchase of a condominium, as long as they remain residents in a KSI apartment.

When renters decide to purchase a home, they must purchase a KSI condominium, not a home from another builder.

“The only requirement we have is that the renters do not use a broker or Realtor to purchase the home,” Miss Kossow says. “We want there to be a direct line from renting from us to owning a condominium with us. Essentially our renters are getting the credit toward the purchase of a home instead of that money going from KSI to a broker commission.”

A unique feature of the KSI offer is that the monthly credit amount is a flat fee rather than a percentage of the rent, which many lease-to-own programs use.

“Our apartment communities range from tax credit communities with very low rents to luxury communities with very high rents,” Miss Kossow says. “We feel we are being fair to everyone by having all residents earn the same amount of credit, regardless of the amount of rent they are paying.”

Miss Kossow says the company is promoting the program at apartment communities and at its condominium communities because some potential buyers come to the condominiums and need a place to rent while waiting for the condominium to be built.

Residents can continue to earn credits while the condominium is under construction and under contract. The credits stop on the settlement date.

Buyers interested in purchasing a single-family home, town home or a condominium from a builder other than KSI may want to discuss potential lease-to-own arrangements with a Realtor or a lender.

Until recent months, the housing market in the Washington area has been a seller’s market, so sellers had little need for additional buyer incentives such as a lease-to-own plan.

As the market shifts and homes are staying on the market longer, some sellers are choosing to rent their property rather than keep them for sale. Some of these sellers might be willing to enter into a lease-to-own arrangement with potential buyers.

Arlene Koby, a Realtor with Weichert, Realtors in McLean, says there are two ways to structure a lease-to-own agreement.

“One way is a rental with the option to buy, which allows the renters an out if they choose not to purchase the home,” she says. “However, the renters will lose the money that was supposed to be credited for the down payment if they opt out of buying the home. Usually in these arrangements the renters are paying a higher rent, which the owner will save each month toward a down payment.”

The second option, Ms. Koby says, is a delayed settlement, with the owners setting aside cash from the rent payments each month to accrue toward closing costs.

“Basically this type of agreement is a contract for sale with a settlement date six months to a year down the road,” Ms. Koby says. “A portion of the rent will go to the earnest money deposit or the down payment.

“The renter and the seller will agree on a purchase price at the time of the contract, with an appraisal required at the time of settlement,” she says. “If the market goes up between the contract date and the settlement date, the buyer gets a good deal. If the market goes down, the seller does.”

Ms. Koby says from the seller’s perspective it might be a good decision to enter into a lease-to-own program, so they can get the rental income with the promise of the sale of their home.

From the buyer’s point of view, she says, it can be difficult to find a rental home sometimes, especially as the rental market is currently tightening.

Consumers interested in purchasing a home who are credit challenged or lack the funds for a down payment and closing costs may want to explore a lease-to-own option as just one other possibility among the array of programs meant to assist people into homeownership.

On the Web:

www.KeyChoices.org, Anne Arundel County’s lease-to-own program

www.freddiemac.com, Freddie Mac

www.fanniemae.com, Fannie Mae

www.dchousing.org, District of Columbia Housing Authority

www.vhda.com, Virginia Housing Development Authority

www.dhcd.state.md.us, Maryland Department of Housing and Community Development



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