Why Your Lease Option Tenant Needs a Credit Check
In the last post, we suggested that you have your lease option tenant meet with a financial expert to make sure that the tenant can exercise the lease option in the future. Here is an example of why this is so critical.
Let’s say that you have a Lease Option Tenant named Sue and Joe. They had some problems a few years ago when Joe had a heart attack. He needed emergency surgery and he was out of work for two years. Sue had to go to part time work to care for Joe and they ended up losing their home to foreclosure. They defaulted on all of their credit cards, and then had to file bankruptcy. (Tear jerker isn’t it?)
But now it’s been two years since the bankruptcy. Joe had multi-bypass surgery and is back working a better job than he had before. Susan is working full time and they have re-established credit since the bankruptcy was discharged one year ago.
They have five thousand dollars to put down and their current credit rating is a 620. The Lease Payment of $1400.00 a month is five hundred dollars less than what they were paying for their mortgage, and is $400 more per month than most rentals are going for in the area, which means better cash flow for you Sounds like they would be the perfect couple to lease option in the next 24 months, don’t they?
But what you don’t know is if you really do want them to exercise the option in twenty four months they have no chance at all at getting financed. Why? Because it will only have been three years from the discharge of the bankruptcy, and you they not only had a bankruptcy but they also had the foreclosure. These are considered to be two “lifetime events” in the lending world, which means that they cannot get financed for at least seven years.
So even though Sue and Joe may be great possibilities, they are not the ones to place in the property unless you are going to be willing to wait until it is seven years after their bankruptcy. This means you will need to readjust the terms of the Lease Option if they are going to be in the home.
You might even have to move them to another property that you are willing to have a long term tenant so that way you don’t lose the opportunity. There is a slim chance you could get them done FHA, but not enough of chance that it would be worth the risk.
As you can see, it’s vitally important that you have your lease option tenants go through this process so you can be sure that the lease option can be exercised in the future.
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