Rent to Own – FAQs About This Home Buying Strategy
1. What is Rent To Own?
“Rent to Own” (sometimes called “Lease to Own”) is an established home buying strategy in which the tenant/buyer has the right to buy the property within a specified time frame at an agreed-to price. Typically, prospective home owners take advantage of using a portion of their monthly rent money to contribute towards the purchase of a home while they get their personal credit history in order so that they can qualify for a more traditional mortgage in the future.
2. Is leasing a house like leasing a car?
The similarities are: when leasing a vehicle, you make a small down payment, then pay a pre-determined monthly payment for a fixed number of years. At the end of the lease, you usually have several options:
* Buy the vehicle outright at the agreed-to settlement price.
* Return the car to the dealer.
* Begin a new leasing arrangement for the same car or its replacement.
3. To qualify, do I need to be employed?
Yes. You need to show recurring employment or self-employment income to qualify.
4. What if my income is difficult to verify?
There are several ways to verify income – in fact, there are some loan programs available that don’t require income verification.
5. Do I need a down payment?
Yes. Most Rent To Own specialists do not get involved in rental programs. You will need some sort of down payment to qualify, possibly as little as $5,000. That’s all it takes to start living the dream of home ownership.
Most Lease To Own or Rent To Own Companies can work with tax refunds, equity from other homes, bonuses, retirement funds, RRSPs, etc. as the source for your down payment.
6. How do I calculate if my debt ratio too high? How much home can I afford?
The rule of thumb is that your house payment, in addition to all other monthly payments, should not exceed 40% of your family’s gross income (total income before taxes). You should add only monthly expenses with fixed payments such as cars, furniture, credit cards, mortgages, student loans, etc. to arrive at that 40%. Also, the final figure should not include items like insurance, clothing, food, utilities, entertainment and so forth.
7. Will changing market conditions impact my property’s purchase price?
That will depend on the Rent To Own company’s policies. A good company will fix the purchase price from the start – a fair price calculated on the projected value of your house at the end of the lease.
8. At the end of the lease, what are my options?
You and your RTO partner will meet to review your options. If you need more time to rebuild your credit, or if you want to increase your down payment, you can extend the lease for an additional year. One possible scenario is your purchase price increases by only one half of one percent per month until you are ready to use your option to purchase. This allows you to continue to benefit from the equity appreciation in your house.
Another option is, with your initial lease period over, if your circumstances have changed or you are interested in another property, you simply walk away with no other obligations.
However, if you do buy at a predetermined purchase price and qualify for traditional financing after that initial lease, your initial deposit with the leasing company will be applied towards your purchase. That money will be treated by conventional lending institutions as an acceptable form of down payment for home ownership.
9. Why is there a need to qualify for a mortgage at the end of the initial term?
To purchase your home outright, you must arrange financing at the end of the lease. Leasing companies will work with you throughout the process to get you ready for that next step in the process. Good Lease to Own companies will connect you with a mortgage specialist in order to help you get a mortgage plus provide guidance in repairing any credit issues you have.
10. You’ve got my attention – what would be my next step?
If you’ve read this article and are now interested in starting the Lease To Own process with your next house, or you have further questions, feel free to contact a local Rent To Own company in your market.
For more information on Rent To Own programs, click on this Rent To Own link.
