Financing rent to own homes is a popular topic. Not only does this include how to enter a rental lease with option to purchase contract, but also how to convert the rental to ownership with a mortgage. For one reason or another, people are choosing rent to own as the path to home ownership. Usually, the reason is needing time to correct credit issues so that the tenant may qualify for a traditional mortgage in the future. Are there reasons holding you back from buying a home now? Are you in a lease with option to buy contract and ready to purchase the home now? Before entering a rent to own contract, check into mortgage qualification first. Often a renter may qualify to buy now and just not realized it. If not, at least know where you stand and get advice for the next steps toward ownership.
Rent to Own Compared to Seller Financing
The primary difference between these two is ownership. In seller financing, the ownership of the property actually changes hands. The property is deeded into the name of the buyer and the seller holds a mortgage for the balance owed. Conversely, in rent to own homes, the buyer is paying rent. Otherwise, the buyer does not own the property but has the “option” to purchase the home at a set price in the future.
Both typically require a down payment, schedule of monthly payments, as well as a time frame for payoff. Most sellers in both of these want to be paid off in a shorter time frame. Therefore a rent with option to buy will have a specific period in which the buyer must exercise their option. If not exercised, the buyer often loses the security deposit. While seller financing may have a balloon payment, which means the remaining balance is due at a specified time.
Rent to Own Homes – Preparing a Lease Purchase Contract
If you’re a buyer and are considering a rent to own contract (lease with option to purchase), follow these steps for best results:
First of all, keep in mind that lenders cannot use a rent history from the person selling the home. Therefore, paying by check each month is paramount. Additionally, make sure that the seller cashes the checks immediately as lenders go by the clearing date. Being this would be a legal contract, hire an experienced attorney and put it in writing. It could even be a good idea to ask the attorney to perform a title search.
Often rent to own homes do not allow enough time for the buyer to purchase. Typically, buyers enter these contracts because they currently don’t qualify for a mortgage. Most common reasons include credit problems or selling another home. Remember, don’t buy a house just because someone will finance it. Get it inspected prior to contract. Finally, remember that a deposit is at risk. Therefore, keep the deposit amount reasonable and do everything possible to create a favorable scenario.
Rent to Own Homes – Convert Your Rental to Ownership
If you have an existing lease purchase contract in place, let’s check your mortgage qualification. Hopefully, most items in the suggestions above have been done already. If not, there still may be options available.
- Gather paperwork for mortgage processing
- Apply for mortgage qualification early
- Explore your mortgage options
The most successful buyers are the ones that save all paperwork. Paperwork includes canceled checks, contract, and more. As mentioned above, providing proof of rent payments are so important. Also, keep in mind that waiting 12 months is not always necessary. Actually, it helps to review your qualification as early as possible. At least you know where you stand if not qualified yet.
Mortgage types for rent to own homes vary depending on each scenario. Obviously, veterans should consider a VA loan because of the potential 100% financing. Another no money down option could be USDA. FHA loans offer low down payment and flexible credit guidelines. Then conventional loans also provide great terms for qualifying borrowers. Our mortgage loan officers will explore the options and explain in detail which apply to your scenario.
Can My Rent Be Used As Down Payment?
A popular question deals with using a deposit or extra rent as down payment. A deposit is common, so buyers obviously want to use it towards closing. If it is worded correctly and paid by check, the deposit may usually be used as down payment. The buyer would need to provide the bank statement proving the source of funds. In addition, buyers often pay a certain amount as rent and an additional part goes toward the price.
There are typically two ways to count the additional payment. First, if the extra amount paid exceeds the fair market rent stated on the appraisal, it may be counted. For example, if the rent is $1000 and they pay $1400, the extra $400 could be applied towards the balance. Another option is the buyer and seller could agree to lower the purchase price by the extra portion paid.
Risks of Rent to Own Financing
Like we said earlier, make sure to document everything and involve appropriate professionals. But, even if you do everything right, there are risks in a lease with option purchase. So, what if the seller has a mortgage on the property? It is possible that the seller pockets the rent yet doesn’t pay their mortgage anymore. The buyer is expecting to buy the home in the future, but the home could go into foreclosure. Thus, this could create a terrible situation and happen often during the real estate meltdown.
Similarly, the seller should pay the property taxes. If not, the county could foreclosure for nonpayment. Furthermore, insuring the property correctly is important as well. Insurance would cover against storm or other damage. Plus, the seller should ensure the type of insurance is changed from an owner-occupied policy to a rental policy.
All of the above-mentioned items could risk a loss of the deposit. Another reason why a buyer should put as small of a deposit as possible. Because even if you pay everything on time, the deposit is still at risk.
Rent to Own Homes Near Me
So, not all landlords want to sell their homes. But, you never know unless you ask. Just remember that a rent to own situation could be favorable to both buyers and sellers. Fortunately, there are lots of ways to find rental homes including Realtors, the local paper, Zillow Rent, Craigslist, or RentToOwnLabs.