Asking what a rent to own home costs is akin to asking what a home or rental itself costs: As one can imagine the pricing is bound to vary substantially. But how about details that are unique to lease to purchase agreements? How do these come into play? What should one expect as far as how a Rent to own homes agreement should price out.
Understanding the Debt-to-Income Ratio
This is perhaps the most essential metric in calculating the cost of a rent to own homes ownership program. The DTI formula is both simple and critical in understanding exactly how a lease purchase option work.
Two Parts to Calculating a DTI
This is the formula mortgage lenders utilize to determine how much debt an applicant can reasonably manage. In order to accomplish this, two components are utilized in calculating a DTI; Front End and Back End. Let’s take a few moments to understand exactly what they mean.
The Front End
This is the monthly amount of debt lenders determine that a borrower can sustain in a regular payment. Lenders will take into account all housing costs: not just the mortgage payment. Among these elements they include are principle, interest, taxes and insurance (this is regularly referenced as PITI). Lenders calculate that a maximum percentage of a borrower’s gross income should equal this amount. The front end is essential in determining what budget a home owner can afford to allocate to their housing costs.
The Back End
This takes into account all debts that the borrower will incur in comparison to his/her gross income. Credit card, tax and auto debt are among the calculations. Where as the Front End of the equation takes into account the PITI factors, the back end lends a more complete perspective. Lenders will pay close attention to this when determining a suitable loan amount.
What Does This Mean in Terms of Purchase Price?
Rent to own home ownership agreements allow buyers to allocate portions of their rent payments towards Option Credits. This is essentially the equity that will be placed into the home during the rental period. The mechanism for calculating the cost of a lease to own home program will take into account the DTI, down payment and PITI factors among others. It’s essential to research tax and insurance rates in the jurisdiction in which you plan to rent to own.