A rent to own home in principle, sounds like a great idea for consumers who do not qualify for a mortgage now.
You get to move into a home right away. You can build some equity and get a couple of years to qualify for a mortgage.
But is it the best option?
In this article we will cover the pros and cons of rent to own homes and tips to avoid a bad deal.
How does the rent to own process work?
Rent-to-own contracts typically last between 2-5 years.
There will be an upfront options fee and consumers are required to pay rent each month with a portion going towards the purchase.
A purchase option fee can cost as much as $15,000, but it will go towards your down payment.
Pros and Cons of Rent-to-Own Homes
- You will be able to move into a home right away
- You have time to improve your credit to qualify for a home loan
- Portion of monthly rent goes towards the price of the home
- Can qualify with poor credit
- Get the home for the current market value
- Large up-front option fee
- You could be forced to leave if the owner gets foreclosed on
- If you terminate the contract at any time you lose the option fee
- You may still not qualify for a mortgage at the end of the agreement
- Interest rate will be higher as rates are on the rise
How a typical Lease-to-own agreement works
Let’s say you find a rent-to-own home or apartment that is worth $200,000.
Your monthly rent payment will be about the same as if you were buying it. $1,600 per month. $250 a month go towards the purchase price.
There is also an option fee of $9,000 required to be paid up-front.
Owner financing may be a good idea if you lack the credit to get approved for a mortgage. Although, there may be mortgage programs that you may qualify for.
Before you move forward on a rent-to-own property here are some tips you can use to see if you can get approved for a mortgage now.
Things to do before signing a contract on a property
Before you sign any type of seller financed or rent-to-own agreement there are a few things you should do to protect yourself.
- Beware of any property which is in need of repairs
- Get a home inspection before signing any rent-to-own contract
- Ask for a copy of a recent certified home appraisal or pay for your own
- Find information on the property owner or investment company
- Make sure you can qualify for a loan in the near future
- Have a real estate agent or lawyer review the contract
- Negotiate a lower option fee and rent payment
Beware of any property which is in need of repairs
If the property is in need of repairs before you move in, make sure the owner fixes them before signing the agreement.
Or add a clause to the contract giving the owner a certain amount of time to fix the problems.
Beware of any home or apartment with major repairs the owner is not going to repair.
Get a home inspection
A home inspection will make sure the property is up to code and without any major problems. You can get the owner to pay for the repairs before moving in.
A home inspection will also let you know of any issues such as foundation, roofing, etc. that will need repairs in the future.
Look for a home that is in very good shape or else you will be paying for the repairs once you purchase the home.
Get an Appraisal on the house
If the property is being offered for a price above what it appraises for it will be almost impossible to get a mortgage on it.
Lenders do not lend more money on a home than it’s worth.
A home appraisal will also be good in negotiations.
Do your research
Google the owner to see if there is any information about them online. Past homebuyers may have made a complaint.
It’s important to know what the complaint is about and address it with the owner.
Check if the owner has any lawsuits or has ever been foreclosed on.
You also need to check if the property itself in free and clear of any tax payments and the HOA dues are current.
Qualifying for a mortgage
Usually the reason you’re considering owner financed homes is because you lack the credit, income, job history, or are self employed.
Speak to a lender know to see what you need to do to be in a position to qualify in the next year or two.
If your income is borderline now, it will probably be even tougher later on with interest rates on the rise.
If it’s credit that is holding you back, look into an FHA loan which borrowers can qualify for with a 580 credit score.
Have a professional review the Rent-to-Own Contract
Before signing any lease-to-own or land contract you should consult a real estate attorney, or work with a knowledgeable real estate agent.
They will be able to help make sure you don’t get screwed in the deal and everything is legal and the terms are favorable.
Many owners will add unfavorable terms deep in the contract that you could miss.
Obviously, you can negotiate some of the terms in the agreement. The sales price, monthly rent amount, amount that goes towards down payment.
Talk to the seller to see if they are can work with you on lowering some of the terms.
The option fee is the biggest item you should negotiate, because it’s non-refundable. If for any reason you do not purchase the property you will lose a significant amount of money.
Try to get the option fee as low as possible to reduce your risks.
Are You Sure You Don’t Qualify For a Mortgage?
An FHA loan is a Government backed mortgage loan. They are very popular because of their flexible qualifying requirements.
If you have a credit score of 500-579 you could qualify with a 10% down payment. However, a score in this range is not likely to be approved.
You will need a minimum 580 credit score to qualify for an FHA Loan. Your chances of being approved increase greatly, and you will just need a 3.5% down payment.
RATE SEARCH: Speak to an FHA lender to see if you qualify
First Time Home Buyers
FHA loans are great for first-time home buyers because of their low credit and down payment requirements.
The down payment of 3.5% can also be a gift on FHA loans. There are also first-time home buyer mortgage programs and grants available.
If you can qualify for a mortgage today, then there is no questions that buying is better than a lease purchase property.
How to increase your credit score fast
There are a few things you can do to increase your credit score fast.
- Pay down your credit card balances
- Negotiate a pay for delete on collection accounts
- Have someone add you as an authorized user on a credit card
- Dispute negative accounts with the credit bureaus
Where to find rent-to-own homes or apartments
Avoid Deed or Land Contracts with Investment Companies
There are investment companies that offer owner-financed and rent-to-own homes that are financed in house. It is basically an installment loan on a home, with no traditional mortgage needed.
These types of properties are typically found in low-come areas where a lot of foreclosed homes can be found for dirt cheap.
In a recent report from a national law organizing seller-financed homes “toxic transactions” built to fail. There are a substantial amount of rent-to-own homes available for less than $100,000.
Many of which are in very bad shape and are purchased from the Government for as little as $10,000. These types of transactions are predatory in nature.
One investment company is offering these homes on a rent-to-own basis but making the buyer responsible for repairs. These homes turn into a money pit for the consumer.
Rent-to-own homes come with a significant risk to buyers. If the owner of the property gets foreclosed on you’re going to be forced to leave.
The contract with be forfeited and you’ll have to buy the home from the bank.
FHA loans are great for first-time home buyers you may be able to get approved for a home even with bad credit.
It’s a good idea to explore all your options for financing before moving forward with an owner financed property.
FHA Loans: Get Approved for a Mortgage
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