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Rent to Own a House - Helpful tips

Article By: Supatra Chowdhury

Many people have this question when they are thinking of renting or buying a new home. They think, “we are first time home buyers who don't have a ton of money to put down on a Mortgage. We have an opportunity with some people who are selling their house and are willing to look at some rent-to-own house options and then selling without a real estate broker. This intrigues us because we can afford house payments but not the down payment. The question is how much of our payment can we expect to go toward the house? And, how should we go about negotiating. Who can give us information about renting to own a house?”. Here are some tips:

You Decide

The most important thing to remember when you plan to rent to own a house is that any amount that goes toward the down payment MUST be paid to the seller with a second check so the bank or other financing company has a paper trail to determine the amount to be applied as a down payment.

The best thing in rent to own a house is that it doesn't violate the "due on sale" clause on existing residential mortgages, and so you are saved from unnecessary tension

Tips from Mortgage Brokers

Expert mortgage brokers suggest that the best way to get your home is not actually rent to own, but rather an actual Land Contract for the owner to sell you the land with a balloon in 12 months. This way, you can build a mortgage history. With a 12-month mortgage history, a few things happen. First, it will no longer be a purchase, but a refinance which is much easier to do with zero money, including closing costs.

Second, you can use the appraised valued rather than the purchase price. This is especially good when you know you have a growing area. Say your seller is willing to sell for $80,000. Well, it is highly likely you could obtain a slightly higher appraisal a year later. Usually, as a general rule, values do go up yearly. So think cautiously before you decide to rent to own a house.

Two Choices

There are two possibilities of having a rent to own home with a purchase taking place in the future. The first is called a Lease Option. In order to have a valid option, you must pay for it that is usually a minimum of 1% of the purchase price. You in turn lease the property for a said period of time, with an option to purchase within a specific time period. If you do not exercise your right to purchase, you forfeit your option money.

The second option to rent to own a house is called a Lease Purchase. A lease purchase does not require option money. As a buyer you can (depending on how the contract is structured and the courts interpretation) walk from the deal without obligation. However these contracts can become very gray area, they are not specific enough for my taste. The contracts have to be very specific. Suppose you decide not to purchase, (depending on how the contract is structured and the courts interpretation) you can be liable for damages.

When you decide to rent to own a house, seek guidance in these matters: Should we take possession as joint tenants, tenants by the entireties? Scrutinize carefully the things that are in the purchasing of Real Property along with the current value of the property. You should also be careful of the type of mortgage (rates are expected to go up), the type of warranties from a deed, the physical condition of a property and the condition of the title while you search to rent to own a house.

Advice from a Landlord

Many landlords who have sold a property or two as a "rent to own", here's what they say: As far as negotiating, enter the deal as though you were buying outright. That means, get a qualified inspection on the house before you rent, negotiate a price that you will pay at the end of the rental period, and have it all put into the contract.

Be sure you will qualify for a loan as of the date you will actually purchase the house. If you don't qualify, the landlord can keep all the money you've paid in as "rent" and you'll lose out.

Most landlords/sellers will charge you the base rent plus a predetermined monthly amount when you are renting to own a house. You can negotiate any type of a deal that works for both you and the seller. But remember, if the deal falls through on your end, the landlord keeps all.

Rent to own can be enticing for potential homeowners who can afford monthly payments, but not the hefty down payment. They are a risk, however, because one never knows what the market will do. If the market "falls" you may be stuck buying a house that is not worth the amount you've agreed upon. If the homeowner is willing to do a rent to own a house, and doesn't need a large lump sum of money right away from the sale, he may also be interested in holding a mortgage for you. Ask him if he'll carry a mortgage for 5 years, with a balloon payment at the end. That will give you more time to survey the market, and you'll be building equity right away.

Mortgage Banker's View

Expert Mortgage Bankers are of opinion that the amount of money that you can expect a lender to recognize as going towards your down payment is the amount of rent that you paid over and above the fair market rent for the property. In other words, if you pay $1,000 per month and the fair market rent is only $500, $500 per month would be applied towards the down payment as far as a lender were concerned. The way the fair market rent is established is by having an appraiser (licensed), do a comparable rent schedule and determine independently what the rent to own a house should be.

Also, you should make sure that you keep very detailed records regarding everything that you do: keep a copy of virtually every piece of paper that comes through your hands and every check which is cashed or deposit slip. Believe me, it may seem like a lot of work, but your Loan Officer will be able to make the process much more easy when you opt to rent to own a house.

If you are confused with the rules regarding how to rent to own a house, consult a Real Estate Attorney. The fees that they will charge should be just a fraction of the commission you would normally pay, and your interests would still be protected.

The Pros and Cons of Home buying

Is rent to own a home a better option? When do you buy and when do you rent? There are a number of things to consider... from what can you expect when you buy a home to how renting differs from home ownership and even how your personality type dictates whether you should be an owner or renter.

Nothing can make you feel more secure than owning your own house, unless buying a home will create financial problems of its own. But are you the kind of person who wants to be free of responsibility, someone who prefers to be able to move in a relatively quick timeframe? If you are, owning a piece of property may not suit you.

Renter's World

Mobility is part of renting. Freedom to take the next job or move for a relationship is easy to come by when you rent a house. And when you do move, there's often more choice of specific location, and price, when you seek rental housing

When you rent to own a house it is for sure that you are not tied down--and don't have to assume financial responsibility for their living space. This is of course a big difference from home ownership: who does the work.

Maintenance

In rent to own a house you don't receive the joys of making a place truly "your own," but you do have limited costs in renting. Landlords are responsible for general upkeep and safety, allowing you to focus on the fine points.
 

Financial pros and cons

Compare which is better; rent to own a house or buying -figure your monthly payments if you were to buy. Compare your monthly rent to a calculation of the following: purchase price and down payment of your home, your annual income (and debt), property tax rate, home insurance rate, interest rate and length of loan. For a better look into your costs, it pays to contact a home-buying specialist.
 

Long-term equity

No discussion of home ownership is complete without considering the long-term benefits of owning. What your house will be worth when you sell depends on the state of your mortgage and the housing market, in particular.

Once you've added up the pros and cons in your own ledger, you can make a positive decision on whether to rent to own a house or be a homeowner.

About The Author 

Supatra Chowdhury, is an international research scholar and a part time content writer. She has written high quality articles for many websites and has also done editing and copywriting. Ms Chowdhury works for Freelance Writer organization, and is a contributor to www.super-mortgages.com .