Quite simply, buying a home the traditional way means putting a large chunk of cash down, getting a loan for the balance (mortgage), and paying off that balance over 25 years. The three biggest requirements of buying a home traditionally include:
- Having a substantial down payment
- Having good credit, and
- Having a steady source of high monthly income
If you lack the resources to buy a home the traditional way or perhaps need time to repair your credit, you may want to consider purchasing a home through a rent-to-own program.
When a seller advertises that he will consider doing a rent-to-own deal, he will be looking for someone to lease the house with two contracts. One contract will be a regular rental- lease contract, and the other will deal with the purchase part of the deal. The purchase contract will be for a period of time that is agreeable to both the seller and the buyer, usually anywhere from one year to three years.
Many people think that the seller will simply set aside some of the rental money as a down payment contribution, but this is not exactly the case. The buyer will have to pay the regular amount of rent, and in addition they will have to pay a monthly installment that will be credited towards the down payment.
Here is an example of how the seller may calculate your monthly contribution towards the down payment:
Say the purchase price is $200,000, you have agreed to a 2 year term, and you have already paid $5,000 towards the down payment. In order for you to save up enough money for a 5% down payment in 2 years, you will calculate five percent of $200,000 and divide that by the 24 month length of the contract. So in this case, you will need to save up $10,000, but since you’ve already paid $5000, your monthly contribution is $208.33. Keep in mind that this amount will be in addition to your rent payment.
If the buyer decides to walk away from the deal, they usually lose their deposit money, as well as any money paid towards the down payment. At the end of the contract, you must be able to qualify for a mortgage for the remaining balance. Working with an experienced mortgage broker early on will help you in repairing your credit and getting back on track to qualify for a mortgage.
Not every seller will structure the rent-to-own in the same way, but as in any real estate deal, you can always try to negotiate the terms that are not satisfactory to you. It is very important that you get independent legal advice for any rent to own contract that you sign.
For some people who need time to repair their credit score, or are unable to save up for a down payment any other way, this can be a great way to eventually purchase your own home. You must be very sure that this particular real estate deal is of benefit to you, and that you can afford to take the risk of not being able to follow through with the contract in case the deal goes sideways.