real estate

How to break a lease and stay creditworthy

Steve McLindenq_v2.gifDear Real Estate Adviser,
I want to buy a house before the first-time homebuyer tax credit deadline ends, but I have an apartment lease at $800 per month through November. Meanwhile, I have found a darling house that I don't want to lose. Is there any way to break a lease?
-- Teresa

a_v2.gifDear Teresa,
Many leases have buyout clauses allowing you to break a lease for a fee. These provisions are designed for tenants who plan to buy homes, get married or relocate, or who are simply dissatisfied with their digs. While such buyout agreements usually carry stiff penalties, they are generally the quickest and most above-board way to break a lease without incurring a credit black mark.

Simply walking away from your lease can cause a 50-point hit to your credit score, and that could make it tougher to turn around and buy a house. Check your lease document carefully. If there is no buyout clause, you can always try to negotiate one with the landlord.

For reference sake, the deadline for qualifying for that first-time homebuyer tax credit up to $8,000 is April 30, 2010, but you actually have until June 30 to close on your purchase as long as you sign a binding sales contract before April 30. Because the federal government seems resolved to make the market walk on its own legs, it's not likely the deadline will be extended. So that June 30 closing deadline leaves you with a time lag of five months from your lease expiration, obligating you for $4,000 in the event you are unable to arrive at workout terms with your landlord. That's money you'd certainly rather use for a down payment on a home.

If the penalty for breaking a lease is too stiff or is nonexistent, you could offer to find a new tenant. In your case, that would probably be someone to sublease the place, perhaps asking for less money than you're paying as an enticement. Most landlords won't actively market such a vacancy because they believe they will get paid regardless.

A buyout or replacement tenant will at least soften the financial blow of breaking a lease and enable you to get things rolling with that darling house you like. However, realize that instead of having a new tenant sign a new lease, the landlord may simply want to keep you as chief guarantor on your existing lease until it expires and add the replacement tenant to it.

Another less-savory option would be to move quickly to buy the house and simply vacate the apartment when the deal is financed and closed, although your credit would still suffer in the aftermath. I don't recommend it.

Make sure you explain the situation to your buying agent, if you are using one. Don't delay addressing these issues because extra time could cost you rent money, and possibly that house you want.

Good luck!

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Real Estate Adviser columns and more stories about mortgages. To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic.

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