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Buying a Rent-To-Own Home:
What You Need To Know
Part 3: The Details
Yesterday we talked about some of the benefits of buying rent-to-own. One of the most attractive aspects of renting to own, however, is the convenience of purchasing the home you always wanted without having to come up with tens of thousands of dollars for a down payment.
A lot of people caught in the credit card trap don’t have credit good enough to buy. If this is you, don’t worry about it. We can still get you into your house and you can be working on improving your credit while you’re living in your dream house.
One of the greatest benefits of this type of agreement when you have less than perfect credit is that by making monthly payments on time, you can be rebuilding your payment history with creditors.
This increases your chances of being approved for a mortgage at the end of the rent to own agreement period offered by the seller. While you’re rebuilding your credit you’re living in your dream house.
You may be thinking, “What if I don’t have the money for a down payment? Am I out of luck?”
You may have the cash for your down payment sitting in a drawer or parked in the driveway. If having too much cash on hand isn’t something you’re likely to be accused of anytime soon, here are a few possible sources of down payment money:
- Do you get a tax refund? If you do, you can basically let Uncle Sam provide your down payment money.
- Borrow against your current retirement plan funds. Check in the information packet from your employer.
- For first time homebuyers, you may be able to remove approximately $10,000 from an IRA to put toward a home purchase. In most cases, this is a penalty-free option.
- Cash in or borrow against the cash value accrued on your life insurance policy.
- Sell any cars, boats or ATV's, motorcycles or recreational vehicles that aren't absolutely essential.
- If possible, ask for help from family members and friends. If they don't have the cash, perhaps they will agree to co-sign on a loan.
- Adjust the withholding tax deduction on your W-2 form. More take-home pay will enable you to save up faster.
Another huge benefit to renting to own is the rent credits that are sometimes applied towards the purchase price when you complete the purchase.
For example, let's assume you pay $800 a month for your monthly payment. Let’s pretend for a minute that you get a rent credit. If you do, included in the monthly "rent" is a portion that is called a "credit". This is the agreed upon amount of the monthly payments that will be applied toward the purchase of the property.
This amount can vary, but it may be about 10 - 30 percent of your monthly rent payment. Let's say you're getting a 20% rent credit. Twenty percent of $800 is $160. That means every month you'd be chipping off $160 from the purchase price.
At the conclusion of the lease contract, you have the right to either purchase the property or walk away from the deal. Typically these “rent credits” that you've accumulated are applied toward the purchase price of your house if and when you decide to purchase it. If you had been in the house 12 months, that means you would have accumulated $1920 in rent credits, which comes off your purchase price, plus whatever you put down when you moved in.
Here's another example:
Joe wants to buy a house and doesn't want to wait until his credit is perfect. Although his credit is kind of shaky, he does have $10,000 in a money market account not doing anything. Instead of waiting for his credit to improve, he decides to offer $10,000 on a non-refundable lease-option consideration because he knows that will let him lock in to a purchase price now before prices potentially move upwards even more.
Since he intends to purchase the new house, he really isn't risking losing the $10,000 because it will act as a down payment when he follows through at the end of the rent to own period or whenever his credit is cleaned up.
In addition, in this example he’s going to get rent credits. Let’s say he’s paying $900/month and $200 of that will be a “rent credit”. If he decides to buy the house 12 months down the road, he will have accumulated $2,400 in rent credits (12 months x $200).
If the purchase price he agreed to was $100,000, when these rent credits are applied, his purchase price would be lowered by $2,400, making it $97,600. Then when you subtract the $10,000 he put down on the house, he would only have to get a loan for $87,600 on a $100,000 house. This means he has an even better equity position and will have to borrow less to buy the house. In the meantime, he gets to live in his new dream home rather than just renting.
Whether you just need a little more time to improve your employment situation, rebuild your credit history or your financial status, having choices such as a renting to own offers you the chance to buy the home you’ve always longed for and gives you a shot at the American dream of home ownership.
It really doesn’t matter who you are or how much money you have – or don't have – renting to own is increasing in popularity. If you’ve got limited cash or bruised credit, this is a really good way for you to realize your dream of home ownership.
We look forward to making your dreams of homeownership come true!
Sincerely,
John Smith
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