The Rent to Own Option

If you would like to purchase a house, but do not meet traditional lending guidelines; the rent to own option may be the alternative that helps make your dream of homeownership come true. In many ways rent to own is a more flexible financing option, mainly because the current owner of the property carries the financing for a set period of time. This allows the buyer time to prepare for traditional mortgage financing in the future. Most rent to own contracts allow the buyer 1 to 3 years to obtain financing from a typical mortgage lender. If you have recently gone through a bankruptcy or foreclosure, have derogatory credit, lack a down payment or your income cannot be counted by a lender to qualify you for a mortgage; the rent to own option may allow you to overcome these obstacles and purchase the home of your dreams.

There are many benefits of the rent to own option for both the seller and buyer. For the seller, they may simply want income to offset their mortgage and taxes on the property, an agreement that the home will be sold in the future, and that the house would be occupied by a potential future owner that will take care of the maintenance and upkeep on the house. If a home is listed for sale, the current homeowner may prefer to sell the property; but if the house does not sell in a reasonable period of time or they owe more than the house is worth, they may consider the rent to own option to at least cover the mortgage and property taxes on the home. For a buyer, this option has many benefits, such as a specified amount of time to allow them to repair their credit, a mechanism to re-establish their credit through on-time rental payments, saving some or all of their down payment through part of their monthly rent payments, avoiding future price shocks by locking in the sales price of the property, and it is also a great way to get to know the house and neighborhood before making the final commitment to purchase the property.

If you choose to purchase a property through the rent to own option, keep in mind that most lenders will require an appraiser to do a rent comparison schedule. This schedule will verify that the monthly credit from the seller towards the buyer's down payment does not exceed the difference between the current payment amount and the typical rent paid where the house is located. The lender will only allow the excess rent payment to be added to the down payment fund. One of the biggest drawbacks for a buyer in a rent to own agreement, would be if they do not exercise their option to purchase the home by the end of the agreement, the funds in the down payment account will likely be forfeited to the seller.

Below is a list of what information should be included in a rent to own agreement:

1. Monthly rental amount

2. How much of the rent will go towards the down payment fund

3. Time period allowed for the agreement to be converted into standard mortgage financing

4. Final sale price of the property

It is a good idea to consult with a lending institution prior to entering into this type of agreement. They should be able to tell you what you will need to do to qualify for a mortgage in the future. Derogatory credit may require a set amount of time to pass, verifiable income may require a new job with stable income or possibly a co-signor may be needed, and they should be able to verify what the reasonable rental amount is in the area; thereby, helping to determine how much of the rent payment would be counted in an accruing down payment fund. As with any financial agreement or legal document, it would be in the best interest of both parties to have an attorney review the documents before they are signed.