It’s time to discuss the reasons why so many families fail to purchase their lease to own home.
In this article I am only focusing on families who are unable to qualify for a mortgage before their option period expires.
In this event, you will lose your right to purchase the house and the seller is no longer required to sell you their home. Your option deposit and rent credits would be lost.
You see, this can be a significant loss for your family and something you surely want to avoid.
Unfortunately, most people are unaware of the issues that will cause them failure. Only after they have moved in and committed thousands of dollars they realize their mistakes.
Seven Common Mistakes Rent To Own Buyers Make
1. Not Starting with the End in Mind
Many people will find a rent to own home and agree to the sellers terms before determining how long it will take for them to qualify for a home loan. Most sellers want you to buy their house within 12-18 months. If your credit requires more time to rebuild then the time period you agree to purchase within, you will stand no chance of buying the home.
This is especially important for buyers who have a bankruptcy, foreclosure, repo, or deed-in-leu. Lending institutions have changed their guidelines drastically over the last few years, so it is very important that you speak with a mortgage professional before you agree to any terms for a rent to own.
This isn’t a deal breaker, we routinely offer homes with an option term of 3-5 years and you can negotiate a long option period too.
2. Setting the Option Period for the Date You Plan to Qualify
After taking the advice from step #1, you speak to a mortgage professional and determine you should be able to qualify for a home loan in about 12 months. Do not agree to an option period of any less than 15 months! Give yourself at least a 3 month cushion and negotiate as much time as you can.
3. Sales Price of Lease to Own Home
Our company offers rent to own homes in the Tampa Bay area. Many tenant/buyers decide they want to move forward with a home after hearing the rental amount, rent credits, and option fee.
They say, “wow that’s a great deal, it’s only $X per month and $X down.”
This is one of the biggest mistakes being made by tenant/buyers. Not only do you need to find out what the sales price(option price) is, you need to make sure the home is currently worth that amount.
4. A Rent to Own Home is NOT Seller Financing
If a seller is offering seller financing they are selling the home to you on terms over a period of time. However, in a rent to own, you are renting the house and the owner has given you the legal right to purchase the house. You must meet the obligations of the terms you agreed to and qualify for a home loan in order to actually purchase the property.
5. Knowing the Lease to Own Defaults
Some sellers use very strict rent to own contracts with a laundry list of potential ways to default. A default is when you fail to live up to a rule you agreed to in the paperwork. For example, paying your rent late, maintaining the property as agreed, etc.
Make sure you review all of your contracts thoroughly and consult legal advice to make sure you’re not signing up for something that is impossible for you to succeed with.
6. How Much Cash to Close Your Rent to Own Home
As of this writing, FHA requires a 3.5% down payment to purchase a home, plus closing costs. If you negotiate a low option fee then you may require a large amount of money when you close on your home.
7. Payment Swing
The amount you agree to rent the house for during the lease period could be significantly less than the monthly payment required for the sales price you agreed to. With today’s interest rates at an all-time low, this is less likely.
But remember, when you own the house you pay the principal, interest, taxes, hazard insurance, and private mortgage insurance each month. Make sure you consider all of these costs when determining what your monthly payment will be when you purchase the home.
What Can You Do Now?
You now know some of the major problems to avoid with a rent to own house. If you are currently searching for rent to own homes, then NOW is the time to start looking at your families finances. This can be a discouraging process if your credit is blemished. But remember, the sooner you start tackling this the sooner you should be able to purchase a home.
If you have not checked your credit report, or it’s been over 90 days then this is a good thing for you to get started with. There are many places you can visit online to pull your credit report and score for free.
Speak to a Mortgage Professional:
This is an important step, although it is uncomfortable for many people to discuss their credit situation with a complete stranger. You can find someone locally or use a large company online. Using the Internet is great because it’s convenient, quick, and you can maintain some degree of privacy.
I like Lendingtree.com. You can go to their website and quickly request that a mortgage professional call you. They can help you determine your approximate mortgage payment, the amount you qualify for, time frame you will need to rebuild, etc. This single step will REALLY help you succeed.