Freddie Mac and Lease-to-Purchase Transactions: What You Need To Know

Do you long to be a homeowner but feel ill-prepared to take on the responsibilities that come along with ownership? If this describes your situation, you might consider a rent-to-own arrangement.

Rent-to-own arrangements are a good option for some aspiring homeowners. When you enter into a rent-to-own agreement, you’ll pay rent for a specific period, similar to a lease. A percentage of your monthly payments is credited to the home’s purchase price when the lease expires.

Before committing to a rent-to-own agreement, we encourage our clients to read the fine print. It is essential to understand what you’re getting into regarding the rental credit. For example, did you know that Freddie Mac limits the credit given on a lease-to-purchase transaction?

If this is new to you, you’re not alone. Today we’re going to give you a brief overview of this guideline to help you determine if a least-to-purchase transaction is the best option for you.

Lease-Option vs. Lease-Purchase Agreements

When you explore the rent-to-own real estate market, you’ll hear two similar-sounding terms floating around: lease-option and lease-purchase. Here is the difference between these types of agreements:

• Lease-option: A lease-option scenario gives the renter the right to purchase the home when their lease expires, but they are not under any obligation to do so.
• Lease-purchase: A lease-purchase agreement legally binds the renter to buy the property after the lease ends.

Freddie Mac’s Lease-to-Purchase Guidelines

As we mentioned, a portion of your rent in a lease-to-purchase agreement is applied to the home’s purchase price at the end of the lease. Under Freddie Mac, this credit cannot exceed the difference between the actual rent and market rent with a minimum of a 12-month lease and 12 months of rent payments. Here is an example:

If you are paying $2,000 per month in rent and the market rent for your area is $1,500, a maximum of $6,000 can be put toward the down payment at purchase time. The formula is as follows:

$2,000 (actual rent) – $1,500 (market rent) = $500

$500 per month (rent difference) x 12 months = $6,000

If math isn’t your specialty, don’t worry! Our experienced loan officers will help you apply this guideline to your specific situation.

Contact Us Today!

Are you considering a lease-to-purchase agreement but don’t know your next move? Our loan professionals understand the details of these tricky transactions and will present you with options to help you reach your real estate goals. Contact us today to see if a lease-to-purchase agreement is right for you!

Connect with one of our loan consultants to learn more.