Turn Rent Into A Downpayment
Renting a home typically doesn’t help you save for a downpayment.
But when you rent to own, some of your rental cost is applied to the purchase price when you are ready to buy.
That’s good news for buyers who have found a house they love, but are not ready or able to buy the home just yet. They need a year or two to bump up their credit, income, or level of savings.
Luckily, future buyers may not have to wait long to pull the trigger. Zero-down home buying programs are prevalent in today’s market. And, current interest rates are making homes super-affordable.
A rent-to-own home is certainly not without its risks, but the right arrangement with a trustworthy landlord/seller can benefit the tenant tremendously.
Here are the rewards — and things to watch out for — when choosing a home to rent now and own later.Verify your new rate (May 20th, 2019)
How Does The Rent-To-Own Arrangement Work?
Most rent-to-own tenants plan to buy at some point, but don’t think they qualify for a mortgage yet.
Rent-to-own homes allow you to choose your home now, then improve your financial position before you apply for a mortgage.
Such agreements generally include some kind of above-market charge to than tenant: an upfront payment for the option to purchase, higher-than-market rent, or both.
The upfront payment or excess rent is credited toward the purchase price if the tenant exercises the option.
This arrangement, also known as a lease option, offers some benefits, but comes with trade-offs. There potential pitfalls, as can be imagined, any time you give “extra” money to another party.
Understand the benefits, but also the challenges and risks of rent-to-own agreements before entering into the transaction.
Advantages Of Rent-to-own Homes
There are several advantages to a lease option, not the least of which is really knowing the home you will buy.
It’s hard to know all the positives and negatives of a home by spending a short time there. In hot markets, some buyers spend mere minutes inside a home before deciding whether to make an offer.
That makes it extremely difficult to know if the commute is bad at eight in the morning, or that the basement is surprisingly cold in the winter.
Living in a home gives the buyer a well-rounded opinion of the home: either it works for their lifestyle, or they should look elsewhere. But that’s not where the advantages of a rent-to-own home end.
1. Head off rising prices
Property values are escalating at between five and six percent per year, on average. Buyers are concerned about affordability in the future. A lease option lets you nail down a price and exhale.
2. Avoid moving…again
The tradition rent-then-buy method means you’re moving twice, at least.
That cost adds up. A national moving website estimates that in-state moves cost $2,300 on average.
Sure, you can find a friend and a truck to cut costs. But friends grow weary of helping people move, too. A lease option helps you and your stuff to stay put.
3. Mandatory savings account
“Forced” savings keeps you on track. If you’re trying to save a downpayment, other things can distract you from your goal.
A new car, designer clothes, and vacations can tempt. However, you can structure a lease option so that every month, you’re depositing money toward your home purchase — money that can’t be hijacked for non-essential items.
4. Make relocation easier
If you’re moving to a new area, you may not want to buy right away. You don’t know the area, and buying would take weeks or months, not days. A rent-to-own home gains you the option to buy the home, but you’re not locked into anything.Verify your new rate (May 20th, 2019)
Challenges With Rent-To-Own Homes
Lease options also have trade-offs of which potential buyers should be aware.
For instance, sellers may price lease option homes at today’s value plus extra to account for estimated appreciation.
However, few buyers know what this number should be. In fact, no one knows with any certainty how much home prices will rise over a given amount of time.
Don’t agree to an unreasonable home price.
1. Fine print
The contract may contain seller-friendly and buyer-unfriendly clauses. For instance, if your payment is one day late, the excess rent normally credited toward your downpayment may simply go to the seller.
2. Extra maintenance costs
You may end up with the landlord’s responsibilities.
Most lease options require the tenant, not the landlord, to be responsible for maintaining the property. That’s an expense you might not consider when determining the affordability of your lease.
3. Downpayment rules
If your agreement is not set up correctly, your lender may not credit you with all of your downpayment.
Excess rent must be above the market rate for the home. The agreement must specify that the extra amount is a downpayment on the property.
In a regular transaction, lenders don’t allow the seller to contribute toward the buyer’s downpayment. This is a rare exception, which really isn’t an exception at all: any extra payments should be clearly defined as the buyer’s money down.Verify your new rate (May 20th, 2019)
How To Avoid Dishonest Rent-To-Own Sellers
Finally, there are aspects of rent-to-own homes that go beyond normal risk — the potential for being taken advantage of.
First, the property title might not be clear, or it might not stay clear.
While you’re leasing the property, you have zero control over the actions of the owner. He or she could stop making mortgage payments, fail to pay taxes, lose a lawsuit, or fail to pay a contractor.
This means the property could be encumbered with a tax lien, judgment lien or mechanic’s (home contractor’s) lien, making it impossible for you to close on the purchase.
Make sure the home is the landlord’s home to sell.
Some would-be buyers have discovered that the person to whom they were paying option money did not own the home in the first place. The “owner” disappeared with the option money, leaving the tenants with no money and facing eviction.
Call a lender to see what you need to do to have a realistic chance of qualifying for a mortgage in the future. Also, ensure the property is able to be financed.
In addition, some landlords make their living reselling the same properties over and over with rent-to-own arrangements. Tenants almost never get to complete the purchase, either because the house cannot be financed (due to title, inspection or appraisal issues) or because owners use the fine print of the agreement to terminate the sale on almost any pretext.
For example, a landlord could look for any and every reason to evict the potential buyers before they purchase.
If you’re going to attempt a transaction like this, take some precautions:
- Ensure the mortgage is up-to-date
- Order an appraisal, property inspection, and title report
- Record the lease option with the county
- Use an escrow account, which is a disinterested third party to hold the money
With the above complete, contact a mortgage professional to make sure everything checks out.
While doing that, check your mortgage eligibility again. It could turn out that, with today’s mortgage rates and low-downpayment programs, you can afford to buy a home now after all.
What Are Today’s Rates?
When considering whether to buy or rent, factor in today’s low rates. All signs point to higher rates in the future. Renters could benefit from buying immediately.
Get a quote now, and check your current home buying eligibility status. All quotes come with access to your live credit scores, and no social security is required to start.Verify your new rate (May 20th, 2019)