Mortgage Rate News

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In my neck of the woods, I’ve seen an increase in rent-to-own signs. Selling is difficult right now, in part because mortgage lenders are being stingy with the qualifying. Would-be home buyers cannot get approved for home loans, and that means that sellers are not able to unload their homes. Rent-to-own provides a nice compromise.

What is rent-to-own?

When you enter into a rent-to-own agreement, you agree on a possible purchase price, and a period of time in which you are renting. You pay an upfront amount and extra rent. This money can be used as savings to use as a down payment on the home in 12 to 48 months, or whenever the agreement specifies.  CNN Money has an example of how a rent-to-own agreement might work:

For example, if they buy a $200,000 home, paying $5,000 up-front and a rent premium of $400 a month on top of their $1,000 market rent, they’ll have $9,800 saved after one year and $19,400 after three.

As you can see, after three years, there is nearly enough saved for a 20% down payment on the house. Plus, if the would-be home buyer has been working carefully on his or her credit profile during that time, it is possible to get good mortgage terms. This also works out for the home owner, since it provides the seller with enough each month to cover the mortgage, and gives him or her a willing buyer in a set amount of time.

Things to watch out for with rent-to-own

There are drawbacks, of course. It is important to be careful when entering into such an agreement. Make sure to have a trusted legal representative look it over to make sure you are protected. These agreements should specify what happens in a number of scenarios, and you should be prepared for the following possibilities:

• Falling behind in your payments: If you fall behind in your rent payments, you may lose the money you have put in upfront and as extra savings.
• Failure to receive financing: If you still can’t get financing after your rent-to-own efforts, you may lose your investment. However, you can actually arrange to have some of your money returned in such an event. Make sure this provision is included.
• Scams: Realize that you might get scammed. Scammers abound right now. In some cases, rent-to-own “sellers” are actually in foreclosure. They take your money, and eventually the home is repossessed and you are left empty-handed.

And, of course, there is no guaranty that home prices will rise. You might end up buying a home that is worth less than you paid.