There are many options for people with poor credit, and a desire to own a home. Many investors throw around terms like Rent-to-own, Lease-Option, but what do they mean?!? First off, a lot of these terms are used interchangeably, and can mean a lot of different things.
Rent to own, lease-option.. There is a couple of ways these work themselves out.
- Generally there is a NON-REFUNDABLE deposit placed on the home at the onset of the rental/lease. You get 100% credit for the deposit if you close on the home. You lose the deposit, if you do not close on the home.
- Generally, you rent/lease the home for 1-3 years, and then there is a balloon payment due for whatever is owed on the principal. This gives you time to get your credit rating under control, while still getting into a home.
- Sometimes there is money escrowed from the rent/lease payments you make each month. This escrowed money can then be used towards your downpayment at the end of the lease/rent term. i.e.- if normal rent would be $800 p/month, but you pay $1100 p/month, at the end of a year you would have $3600.00 for a downpayment. Be aware, that sometimes this escrowed money is NON-REFUNDABLE if you decide not to purchase the home.**
- Depending on the contract, you may have to take care of all maintenance, taxes, insurance, etc. It’s going to be your home, better get used to taking care of it now!
- If there is a balloon payment, it will be up to you to get that financing at the end of the rent/lease term. Check to see if there is a prepayment penalty in case you want to close before the rent/lease term is up.
- Generally you will pay a higher interest rate for this option than the banks would charge you. The positive is that you can get into a home before you have cleaned up your credit rating.
- The seller retains title to the property while you are renting/leasing the property. This could be bad if the seller doesn’t pay taxes, mortgage payments, gets a lien on the property, etc. Check to make sure your contract(s) are recorded to help stop some of this. Talk to a lawyer to better cover yourself.
- You generally lock in the price of the home at the onset of the rent/lease. In a down market, this could allow you to lock the price in cheap and take advantage of any appreciation in the years you are renting.
- You may be able to assign your contract/option to purchase to someone else. i.e.-sell your deal to someone else. Check to see what your contract allows.
There are quite a few things to watch out for and or think about, but a rent to own or lease-option can get you headed into the right direction. Just make sure to do your research and consult the experts!
** it’s almost always a better deal for you to save your own money, and or get your own loan through traditional means. Sometimes people need to have someone else policing saving and better credit habits.
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