What Are Rent-To-Own Homes?

In this blog, we will cover what are rent-to-own homes and how they work.  Rent-to-own homes offer both home buyers and home sellers advantages. Homebuyers offer great benefits if the home buyer has recent credit issues. Recent credit issues such as the following will disqualify buyers from traditional mortgages:

• bankruptcy
• foreclosure
• short sale
• deed in lieu of foreclosure
• recent derogatory on their credit reports

What Are Rent-To-Own Homes

Borrowers need 12 months of on-time payment history can be established to qualify for traditional mortgages. There are mandatory federal waiting periods after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

Homebuyers who had a recent bankruptcy or foreclosure no longer have to wait two to seven years to become a homeowner. Government and conventional loans have mandatory waiting period after bankruptcy and foreclosure. With home values increasing double digits year after year, homebuyers do not have to get priced out of the housing market with buying rent-to-own homes.

The waiting period after bankruptcy for a home buyer to qualify for FHA loans is 2 years from the discharge date of the bankruptcy. The waiting period is 4 years for a home buyer to qualify for a residential conventional loan after the discharge date of bankruptcy. The waiting periods are 3 years after a foreclosure, deed in lieu of foreclosure, and short sale for a home buyer to qualify for FHA loans. The waiting period is 7 years after a foreclosure for a home buyer to qualify for conventional loans. The waiting period is 4 years after a deed in lieu of foreclosure or short sale for a home buyer to qualify for a conventional loan with a 5% down payment.

Homebuyer Options After Recent Bankruptcy And Foreclosure

If buyers cannot wait for the waiting period after a housing event and/or bankruptcy then rent-to-own homes are a great route to take until they can qualify for a mortgage. The waiting period gives the rent-to-own-home buyer an opportunity to re-establish their credit.

How Do Rent-To-Own Homes Work?

Another benefit of rent-to-own homes is that part of the monthly housing payment, rent, can be allocated towards the purchase price of the home. The home buyer of the rent-to-own home starts developing equity. On rent-to-own homes, the price of the home is already agreed upon. When the eventual purchase date rolls along, whether it is one year or three years from the contract sign date, the agreed-upon purchase price will not go up.

Homebuyers of rent-to-own homes can take advantage of potential appreciation which results in instant equity. Those entering into rent-to-own homes can check out the neighborhood.

Buyers should do their due diligence when buying rent-to-own homes just like they were buying a home the traditional way. Check the amenities the neighborhood has to offer. Research the public school system before actually closing on their rent-to-own home. The negative aspect of rent-to-own homes is that if the home buyer decides not to purchase the home at a later date, he or she may lose the portion of the payment that goes toward the purchase price. The initial down payment may be lost depending on how it was negotiated in the purchase contract. It depends on how the deal is structured originally.

Benefits of Rent-To-Own Homes

If there is more supply of homes versus demand, rent-to-own homes are a great way of selling a property. The sellers do not have to sit for months to have their homes sell or get lowballed by a home buyer in lieu of a quick sale. Sellers of rent-to-own homes can normally get a decent price for their homes. Rent-to-own homes are homes that the tenant has the option to purchase anytime until the term of the lease. i

Buyers of rent-to-own homes normally do not qualify quite yet but will in the near future due to one or another reason such as credit or income issues. Because buyers cannot get current financing, they will be getting prepared for their financing during the rental period.

The purchase closing date has been extended to a future date. During this time, the renter will have a chance to work with a lender in re-establishing their credit and preparing to get qualified for a traditional home loan. A seller will require a non-refundable deposit from the rent-to-own home buyer. So the buyer has skin in the game. In the event, that the buyer does not close on the home at a future set date, the date can be extended or the contract be modified or the agreement can be terminated. If the buyer terminates the purchase contract, the buyer can lose all of his or her earnest money.

Cons of Rent-To-Own Homes

Having attorneys represent them is strongly recommended for rent-to-own homes as well as extensive due diligence by both sides. Buyers should have a home inspection done to make sure that the home is free of any major repairs. Buyers should also have an appraisal done. This is to make sure that they are not paying too much for the property. This holds true even though the actual purchase will not be done until a later date.

The buyer should have their attorney do a title search. Also, make sure that the home has a clear title. Not a bunch of liens where even though the home will not close until a later date, there will be no issues. The buyer should make all deposits as well as rent payments with a bank check. Never use cash so they can document that they held their end of the agreement by making timely payments. Plus the future lender will want to see canceled checks to verify verification of rent.

Contracts on Rent-To-Own Homes

Sellers and homebuyers of rent-to-own homes should retain their own real estate attorneys on rent-to-own home transactions to protect their interest.  Sellers need to make sure they are selling the property to a renter who will make timely payments and not default on their agreement. Buyers need to make sure the home seller delivers clean title and does not default on their part of the transaction.