Is Renting-to-Own Smart?

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What You Should Know About Rent-To Own Homes

Rent-to-Own homes, also called lease-option or lease-to-own homes, offer a way for people who don’t yet qualify for a mortgage or who aren’t quite ready for the commitment of ownership, to occupy a home. They do so for a year or two or three, with the option to purchase at the end of that term. It’s not a common way to purchase a property, and the selection of rent-to-own properties is tiny compared to the selection of properties available purely for lease or sale. In addition, rent-to-own contracts tend to favor the owner/landlord and can put renters at a disadvantage.

Still, some people manage the process successfully. Let’s walk through the circumstances that can make renting to own a home a good idea.

Mortgage Within Reach

What does it mean to be close to qualifying for a mortgage? You might have a bad credit score– one that’s below 620, the bare minimum some lenders will accept – but the circumstances that depleted that score are behind you and you’ve been steadily improving it ever since. Maybe your debt-to-income ratio is too high, but not by much, and you have enough room in your budget to make extra payments and reduce your debt significantly over the next couple of years. You might have a good job, or gotten one with a significantly better salary, but you haven’t been there long enough for a lender to consider it a stable source of income to repay your mortgage over the long run. Similarly, you might be successfully self-employed, but not have a long enough track record to make lenders comfortable.

If any of these describe your situation, renting to own might be a good idea. You can lock down a property you like now and possibly save yourself a move or two. Then you’ll have some time, typically in two to three years, to improve your credit score, lengthen your employment history, increase your savings or do anything else you need to make yourself a stronger mortgage applicant.

Are the Fees Feasible?

When you rent to own, you pay a lease option fee to secure your right to purchase the property at a later date. This fee usually nonrefundable. So be wary of getting into this if there’s a more than 50/50 chance you’re going to move and not buy.

If you don’t ending up buying, you’ll also have wasted money on the nonrefundable rent credits. These are a portion of your monthly rent payment that the landlord/seller credits toward your down payment if you buy, but keeps as compensation for having taken the property off the market if you don’t. Factoring in these credits often makes the monthly payments slightly higher than the “going rate” for regular rentals. So that means you’ve paid more each month for nothing if you don’t purchase. It isn’t likely that you’ll get a landlord/owner to agree to a refundable rent credit and refundable option fee to give you the flexibility to move.

Cons

Since it’s less common, the rent-to-own process isn’t as tightly regulated as the home-buying industry or even the rental industry. This lack of regulation can be a good thing, in that it gives would-be buyers and property owners more freedom in negotiating the purchase option part of their contract (the lease agreement and purchase agreement are still subject to all the usual real estate laws). On the other hand, the lack of industry standards might make it easier for unscrupulous owners to take advantage of unsophisticated buyers. In addition, there isn’t nearly as much educational material available on renting to own as there is on buying a house outright.

The Bottom Line

Renting to own a home isn’t for everyone. In fact, it’s not for most people, but if you’re considering it, there are some great tips to follow. You’ll face a limited selection of properties. There are many things that can prevent you from buying the home at the end of the lease term, from a change in your life circumstances to a continued inability to qualify for a mortgage – and there are penalties, in the form of nonrefundable fees and costs, for not carrying through with the purchase. Nevertheless, for those who just need to buy some time, renting to own can be a way to reside in your dream home now, and pay in full for it later.

Watch this great video on How Rent-to-Own Works, and another article from CNBC on Are Rent-to-Own Homes a Good Option to Consider?

Also check out this article by FOX: What to Know Before Jumping into a Rent to Own Lease

Michelle Allen

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One thought on “Is Renting-to-Own Smart?
  1. Michelle Allen

    Will you qualify for a mortgage at the end and what is the Rent to Own company doing to help you?

    The only reason that people look at Rent to Own is because they have credit and/or cash challenges that prevent them from owning outright immediately. If a Rent to Own company says that they can approve you for their program, that’s great but that’s only the beginning. The real question is, will you be ready to go at the end of the process? Here is a list of items that a Rent to Own company must provide to you in order for you to clearly understand what needs to be done to be mortgage-ready:

    First you need an assessment of your current situation.

    1. What are your liabilities? Do you have any outstanding credit problems that still need to be resolved?
    2. What is your Beacon score today?
    3. How long will it take for you to resolve your credit issues and why?
    4. What are the lender requirements when it comes to your particular issue (i.e. bankruptcy, consumer proposal, Beacon reject, etc)?
    5. Are there any errors on your Credit Bureau that need to be resolved? We see problems on a lot of files. This is a common issue.
    6. What is your affordability? How much can you afford to buy given your income and liabilities? Conservative estimates should be used for all factors in evaluating affordability and you need to ensure that you can qualify for the buy-out price.
    7. What will your Total Debt Service and Gross Debt Service ratios be when you buy out? Are they in line with lender requirements?
    8. What Beacon score do you need by the end of the deal in order to ensure that you qualify for a mortgage? If your TDS goes above a certain level, you need a higher Beacon score. Ask if this applies to you.
    9. What steps do you need to take to improve your credit file?
    10. Do you have enough credit instruments and are the credit limits high enough to meet lender requirements?
    11. By the end of the evaluation process, you should have a clear picture of where you are today, what you need to do in the next two to three years and what it will take at the end in order to be mortgage ready. If you do not know the answers to any of the above questions then ask for more information. Ensure that you have a plan. You are responsible for executing the plan but you should have clear guidance from the Rent to Own company in order to increase your chances of success.

    Renting-to-own is a very big deal. Be sure to ask yourself these serious questions and be honest with yourself about them. When looking at how much income you have right now, don’t factor in “well..i am getting promoted in 6 months.” You may not get promoted. Don’t base what you have financially on where you THINK you may be at in a year. Live in the now. If you can’t make payments you’ll lose everything you have put into it. Be cautious and take all necessary precautions.

     
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