Direct Financing vs. Sales-Type Leases

Direct financing and lease options are low-cost options to finance a home purchase.

Direct financing and lease options are low-cost options to finance a home purchase.

If you worry about qualifying for a mortgage or gathering the down payment for the home of your dreams, you might ask the seller to act as the lender. The seller may lend you the money to buy his home in exchange for a promissory note. The seller may also agree to lease you his home for a period of time and then sell you the home at an agreed-to price in the future. In exchange, you pay rental fees, an upfront payment and the sales price.

Direct Financing

A seller may finance some or all of a home's purchase price. Your promise to pay for the home is secured by a mortgage. A seller may offer you beneficial terms depending on how long the house has been on the market. For example, she may offer a low interest rate or a variable payment structure. Issues that will influence the seller's willingness to offer you financing include the interest rate you are willing to pay and the tax consequences of the sale to the seller.

Advantages of Direct Financing

The fact that a homeowner may charge an interest rate that is less than that charged by a conventional lender is a key advantage of direct financing. In addition, you will avoid upfront points and fees charged by lenders and the purchase of private mortgage insurance. In addition, the seller may not require you to have a high credit score. In addition, you may get flexible repayment terms, such as interest-only payments for a few years.

Sales-Type Lease

A homeowner can create a sales-type lease that allows you to lease a home and receive the right to buy the house for an agreed-to price in the future. You will make a lump-sum payment at the start of the lease for the purchase option and pay monthly rent during the rental phase of the agreement. If you decide to exercise your option and purchase the home, some or all of the rental payments may be credited against the purchase price.

Advantages of Sales Type-Lease

A sales-type lease allows you to move into a house without a down payment or third-party financing. The lease option also also enables you to purchase a home even if you do not qualify for a conventional loan. This purchase option also provides you the ability to watch the increase or decrease in a home's value for a period of time before you purchase the home at the option price. If the market value rises above the option sales price, you will have equity in the home when you purchase it. As a result, it will be easier for you to obtain financing.



  • Nolo's Essential Guide to Buying Your First Home; Alayna Schroeder et al.
  • Real Estate Investing For Dummies; Eric Tyson et al.

About the Author

Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.

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