If you are trying to purchase a home you may find that it is not possible to obtain a mortgage from a bank for various reasons including your credit history, credit score or employment history. Banks have very strict criteria that you must meet before they will approve a home loan. You may not qualify for a loan from a bank or the interest they want to charge you may be more than you are willing to pay then the option to rent to own may be a good choice for you. Normally you enter into a contract with the landlord and after a set amount of rent is paid the home is yours. While these contracts are pretty basic there are some options for you to consider before putting your name on the dotted line.
Rent to own or mortgage?
There is an advantage to taking out a mortgage for your home. You will usually end up paying less for your home by taking out a mortgage from a bank depending on the interest rate that is set. For example, if you purchase a $300,000 home by financing it through a bank your may pay approximately $145,000 less than if you rent the same home for 30 years. This is because rent normally increases as time goes by and your loan payment stays the same.
Bank or private Loan?
You may have the option to rent the property for a specified time and then make a balloon payment for the rest of the purchase price. If this is the contract you choose you will need to find financing for the balloon payment. You may be able to rectify the circumstances that prevented you from getting approval from a bank by the time the balloon payment is due. If this is the case then a bank loan for a mortgage will have the best interest rate available at the time.
Your landlord may enter into an agreement with you to finance the remainder of the purchase price for your home. He would become the lending institution and it would be wise to hire a lawyer to set up this agreement for your protection. You would make your payments to him and after the allotted time you would own the home and hold the title. These types of agreements are normally for much shorter times than a traditional mortgage.
Remember that while you have a loan outstanding for your home you do not hold the title. The lending institution or landlord will hold the title until the home is completely paid for. This means that if you decide to move before you are through paying for the property you may forfeit all of the money you have paid up to that point if you are renting to own. You must be sure that your budget is adequate to enter into such a loan or contract so that you do not lose your investment.
The most common way to finance a rent to own home is for your rent payments to go toward the purchase price of the home. Generally these agreements are for as short as 3 years or longer depending on your situation. A rent to own contract is still required for this type of agreement stating exactly how much the house costs, what amount of your rent will go toward the purchase and the duration of the terms.
Any money that you can put down toward the purchase price of your home will decrease the length of the contract that is required before you can take possession of the property. Even a small deposit payment is better than nothing. Your contract should state clearly whether your down payment is refundable or forfeited should you choose to terminate your agreement for purchase.
This is a fixed rate that is added onto your loan every month for the duration of your loan. Some landlords may give you a break if you can pay off your loan before the last payment is due. Depending on the contract you enter with your landlord and if it is considered a loan you may or may not accrue interest. Normally you can expect a 1% to 5% interest rate on a loan held by your landlord.
If you choose to have your landlord carry the financing you should hire a real estate lawyer to draw up the contract. This will protect your interests and make sure that you are protected. If you enter into a rent to own contract without a lawyer’s advice you are putting yourself at risk of not having any legal recourse should the deal sour.
Examine your budget and credit. If you find it is in your best interest to rent to own a home then know your options and your legal rights.