The typical rent to own buyer desperately wants to become a home owner but their credit scores aren’t sufficient enough to qualify for a reasonable mortgage at the present time.
The rent to own buyer will typically need 6 – 24 months to rebuild credit, accrue monthly rental credits, and to save money for their down payment.
The advantage to the buyer is they can live in the home now while they get their financial affairs in order, lock the price and build down payment credits.
The advantage to the seller is they typically have a much stronger tenant living in their home vs. the typical rental scenario. The seller also collects a larger, non-refundable option fee down payment from the tenant. The tenant now has a vested interest in maintaining and buying the property from the seller at the end of the option period.
Credit repair is an extremely important component of the rent to own home buying process. The buyer must be proactively working on building better credit throughout the option period. It is recommended that the rent to own buyer works with a respected lender and/or credit repair firm to assist with the credit rebuild. The seller should also be working with their future buyer to ensure they remain on track to purchase their home.
Due to the current ailing real estate market, it is critical that the rent to own buyer and the seller work together as a team. Some of the major issues everyone needs to pay close attention to are:
- Is the property valued correctly? If not, the buyer runs the risk of having difficulties when they try to get their financing. If the house doesn’t appraise for the agreed upon sales price, the seller needs to step up and renegotiate or risk losing the deal all together.
- Is the buyer making on time rental payments each and every month? A good lender will be able to use this “on time” documented payment history to the benefit of the rent to own buyer at closing time.
- Is the seller willing to credit the buyer (rent credits) for “on time” rental payments? This is extremely important in assisting the rent to own buyer with building additional down payment funds.
- Is the seller meeting all their mortgage repayment obligations while the tenant is preparing to buy the home? Unfortunately, there are some cases where the seller has defaulted on their mortgage obligations and the home has fallen into foreclosure before the rent to own buyer has had a chance to buy the home. This is rare but it could happen…be careful…ask to see the buyers current mortgage statements every so often.
- Is the sellers title free and clear? This is a very important to look into because the seller could have difficulties closing if they have a big lien or judgment attached to their home.
There are a few things to watch out for when entering into a rent to own agreement but for the most part it can be a very viable option for both parties. The seller is able to sell his/her home creatively in a slower real estate market and the buyer locks into a price and has time to build their credit.