Should You Break Your Lease to Buy a Home?
If you’re currently renting but looking forward to buying your first home, you’ve likely done a bit of legwork at this stage. You’ve met with a loan officer who helped you determine how much you can qualify for and what type of home loan best meets your needs. Your savings account is slowly building as you save money for your closing costs, and maybe even a down payment, though VA does not require one.
Even though you have enough money now, you still have plenty of time to save even more because your lease doesn’t expire for another four months.
And then it happens: your dream home hits the market. Should you break your lease so you don’t miss the opportunity to buy it?
What is a lease?
A lease is a legal, enforceable agreement between you and the owner. A lease will, among other things, highlight your monthly rent, when it’s due and how much your deposit will be. And speaking of your deposit, what happens to your deposit should you break your lease? And speaking of breaking your lease, what will you have to pay?
A lease doesn’t force you to live in the property for a specific time. For example, if you sign a 12 month lease you’re not forced to stay there for 12 months, you can move out early but if you do, it can cost you. Depending upon the lease, you can be responsible for not only rent for the remaining lease term but also your deposit as well.
Say that your monthly rent is $1,500 and your deposit is equal to your first and last month’s rent on a 12 month lease and you break your lease with four months to go. The damage:
- $3,000 – Deposit
- $6,000 – Remaining rent obligation
A $9,000 total.
That’s a lot of money.
Research your lease terms
First, review your lease agreement. If you didn’t read the entire lease before, do it now. You’re looking for an opt-out clause. An opt-out clause allows you to cancel your lease with a predetermined fee. This fee can be as little as one month’s rent but whatever it is, see if your lease has one. This is your easiest out.
Can you sublet your rental? Does your lease strictly prohibit a sublease? If not, then you have the opportunity to find a short-term renter to fulfill the remaining months of your lease. To entice a would-be renter offer to subsidize the monthly rent by $500 per month. This costs you $2,000 instead of the $9,000 necessary for an all-out break.
If your lease prohibits a sublease, find another renter before you contact your landlord. Better still, find another renter who will pay as much or more of your current rent and who is willing to sign a lease extension.
If none of these options work, call the landlord and attempt to work something out. A landlord hates to lose good tenants but if you do have a good relationship you might be surprised how flexible the landlord will be, especially to those who are buying their first home.
Should your landlord stand firm, you need to run a few numbers.
Is breaking a lease worth it?
First, step back and take a breath. Is that house that just hit the market, really, really your “perfect” home? Evaluate your decision not based on emotion but on practicality. Will another, similar home soon show up? Is it worth losing $9,000?
Whether it’s $9,000 or $1,000, breaking a lease has other considerations.
- Are home prices on the increase?
- Are mortgage interest rates rising?
- Is your rent higher than what your mortgage payment will be?
- If you do have to pay a penalty to break your lease, will you recover those fees over time due to property appreciation and/or lower monthly payments?
- Finally, don’t forget about the mortgage interest deduction you’ll have with a mortgage
How do mortgage lenders view a broken lease?
In reality, a lender doesn’t care if you break a lease or not. A lender wants to know if you paid your lease on time and can prove it with copies of canceled checks. A lender knows renters will sometimes find themselves in a position to break a lease and this really has no bearing on a loan approval as long as you’ve settled with your landlord. If you’ve broken your lease and paid your penalty, all a lender wants to see is that your penalty didn’t deplete the funds used to buy the house.
Breaking a lease isn’t a crime but it can be expensive. When you need to break a lease, take your time, read your agreement and review all your options. There’s usually a way to please all parties, and sometimes even get into your dream home sooner than you thought you could.