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Renting to own with bad credit: Here is how it works

Most home buyers need to have a mortgage to be able to buy the house you want. With that said you need good credit and a decent sized down payment depending on the type of mortgage you want.  For those that don’t have good credit or a down payment there is an alternative option for you in which you would rent to own the home. Renting to own means that you lease the home with the option to buy either before the lease expires or after the lease has expired.

These agreements typically consist of two parts a rental agreement and the option to buy agreement. Because of this you may need to take extra precautions to protect yourself.  That said typically the security deposit and a part of the payment will be applied to the purchase of the home (down payment).  Another thing to consider in reading the lease agreements are who pays for the utilities and does the repairs for the property.

There may be  a one time nonrefundable fee that is called the “option fee” which give you to buy the home in the future whether before you lease if up or after the lease is up. The fee itself will depend on the owner of the home but many times they range between 2 and 7 percent of the purchase price or one of half times the monthly rent amount (again this depends on the landlord).

Remember there are more than one rent to own contract type and some are more flexible than others. They all give you the right to buy the home but not all provide the obligation to buy the home when the lease is up. That said depending on the agreement if you decide not to buy the home at the end of the lease then you can walk away from that home. Depending on the agreement try and negotiate away from the lease-purchase contracts as those are legally binding and you are obligated to purchase the home at the end of the lease.

Another big thing to consider when looking to rent to own homes is purchase price at the end of the lease and any balloon fees that may be in the contract. Always check and determine if the homes value is worth the purchase price before agreeing to it.  Also make sure that you are aware of the rental amount for both the rental and the rent to own option. The rent to own option is typically a higher price then just renting so depending on credit score and finances that may be an option to go with too.

How your credit comes into effect while looking for a house is fairly simple. Mortgage lenders often require good credit scores and reports, they are more flexible with job changes as long as there is steady income. Another thing they look at is collections, debt to income ratio, and whether you made new substantial purchases( Don’t go buying a new car or anything super expensive while getting a mortgage unless you have to).

Some things that you can do to improve your credit is pay down debts, ask for your current landlord and perspective landlord to report to the credit companies as this will help boost your score and does look good on your report. Another option that you may have is to call creditors and ask them what is the lowest amount the will take to make your account be in good standing if it is not.

All in all a rent to own agreement does allow you to build credit, improve your score, and get the home you want without having to move right away as most rent to own options are a 3 year rental term.


Rent to own- How does it work?

Typically perspective tenants can have a portion of their monthly rent payment go towards a down payment for the home they are currently renting and plan on buying.  Rent to own options are good for those that are looking to stay in the home they are currently renting. It is also an option if you have less than good credit and need to be able to build your credit through renting.

When you rent to own the tenant signs an agreement with the owner of the home that will allow for the home to be leased with the option to buy the home later some owners prefer two to three year options. The monthly rental payment also includes the additional payment for the down payment of the home. Some owners may require a larger security deposit and be willing to add that to the down payment but that does depend on the rental agreement.

The rental agreement will state how long the rental lease is for, the amount of rent that is towards the down payment and the amount of the security deposit that is toward the down payment. The lease agreement should also state the home purchase price. That said before your lease ends it would be beneficial to get preapproved with a mortgage before the lease is up to ensure that you can afford the home. If for some reason you cannot get preapproved then the lease terms may be null and void.

For my house we (owner and I) came up with a rental agreement of a $1500 security deposit, rental payments of $1000 a month with $300 per month going towards the down payment, the lease length of three years and the purchase price of $150,000. This meant that at the time the lease was up there was 12,300 for down payment over the three years, which allowed for a 12 percent down payment of the purchase price.

If you are only using a 3.5 percent option then looking into a FHA loan may be a good option for you but I was able to get a conventional loan with my 12 percent down. That said having the preapproval from the mortgage company provided insurance to what all of the options that the perspective owner may have.

If for some reason you are not able to be preapproved and are unable to afford this home you can ask the owner if you could continue to rent the home without the rent to own option or to continue but modify the rent to own lease that you currently have with them. Anytime the rent to own lease is modified it is advised that you have an attorney look over the lease to clarify both parties responsibilities.

A major benefit to using a rent to own option is that all of your housing plans are in place. Meaning you do not have to move unless you want to but renting to own does limit your options on that so be cautious when fully deciding whether to just rent or rent to own. Another benefit is that renting to own allows you to build your credit and repair your credit. Credit scores and reports are a big factor when trying to get a mortgage and the rate that you will get as well as the amount you will qualify for so it is better to have your credit monitored and repaired before the lease is up.

Another good credit booster is asking your landlord/ home owner to report your rental payments to the major credit agencies. This along with making your payments on time can boost your credit score as well and does look good on a credit report.

All in all depending on your situation rent to own may be a good fit for you if you really enjoy the house you plan on renting and do not wish to move. If you need to build credit to buy a home later on and are comfortable with the rental agreement and payments.


The 3 Best Reasons to Buy a Home in 2018

Figuring out when to plunge into the real estate market can be quite intimidating—especially when prices are high, choices are limited, and history urges restraint.

“We’ve seen two or three years of what could be considered unsustainable levels of price appreciation, as well as an inventory shortage that resulted in a record-low number of homes for sale across the country,” says Javier Vivas, director of economic research for®. “When you factor those together, you have a market that has to either explode or see some relief.”

Comforting, right? Well, take heart: Experts agree that relief is indeed on the horizon.

New predictions for 2018 forecast more moderate gains in home prices and rising inventory levels, while low unemployment and record levels of consumer confidence mean more buyers are feeling good about their finances.

A lot depends on where you live (and how much you plan to finance), but these factors combined could mean 2018 will be your year to take the buying plunge.

1. Rates are going up

After years of record-low interest rates (hello, 3%!), the Fed is finally making some noticeable increases: The rate for a 30-year fixed mortgage broke the 4% mark last year. And with economic growth continuing to carry momentum, Vivas predicts we’ll see at least two to four more rate increases throughout 2018. Rates are anticipated to hit 5% by the end of the year.

“The big story there is that those increases will further constrict affordability,” Vivas says. “The more buyers wait, the more expensive it will get to buy—not just because of home prices, but because of inflationary pressure.”

In other words, if you want in on the American dream, now might be the time.

2. Prices are climbing, but not crazily fast

Home prices have soared over the past few years, pricing otherwise well-positioned buyers out of high-cost areas and leading some experts to cry “bubble”. But in 2018, price increases are expected to moderate.

Vivas forecasts a home price increase of 3.2% year over year, after finishing 2017 with a 5.5% year-over-year increase. Existing-home sale prices are predicted to increase 2.5% year over year.

Of course, it all depends on where you live. While red-hot markets such as San Francisco are predicted to finally lose some steam, sales numbers and home prices are poised to climb in Southern states such as Texas and Florida, where economic momentum continues chugging along and new construction is happening in the right price points.

So what does that mean? Basically, home prices will still increase, but not at the same pace as they have over the past few years.

3. Inventory levels will begin to increase

An inventory shortage has plagued the U.S. housing market since 2015, forcing some buyers to settle (a tiny house with linoleum floors for $1 million, anyone?) and keeping others out of the buying game entirely. But by fall 2018, the tides will begin to turn, with markets such as Boston; Detroit; and Nashville, TN, recovering first.

The majority of inventory growth will happen in the middle- to upper-tier price point, in the ranges of $350,000 and $750,000 and above $750,000, Vivas predicts.

New home construction is also expected to expand. But that will happen slowly, thanks to a constricted labor market, limitations on the amount of lots and land that’s available, tight bank financing for building loans, and a run-up in building material prices, says National Association of Home Builders chief economist Robert Dietz.

“It’s been a slow climb back from the recession, and now we’re confronting all of these limiting factors and supply-side constraints,” Dietz says.

It’s particularly tough, he says, for builders to break ground at the entry level for first-time buyers, particularity in high-cost coastal markets such as California. That means it will take longer for those inventory levels to recover.

But there’s a bright spot: Builder confidence is at its highest level since 1999, according to the NAHB. And that means hope is on the horizon.

“As we head into 2019 and beyond, we expect to see the inventory increases take hold and provide relief for first-timers and drive sales growth,” Vivas says.

The wildcard: Taxes and politics

When the Republican tax plan was introduced, the proposed elimination of the mortgage interest deduction was all anyone could talk about: While the new limitations on the deduction will affect only 2.5% of all existing mortgages in the U.S., it will have a disproportionate effect on Western markets, where 20% to 30% of mortgages are above the new threshold, according to Vivas.

Across the board, experts agree that the new tax plan decreases incentives for homeownership and reduces the tax benefits of owning a home—particularly in highly taxed, expensive markets such as California, Illinois, New York, and New Jersey. But on the flip side, that means that if fewer folks are motivated to buy, then there’s less competition for those who want in the game. Plus, some taxpayers—including renters—will see a tax cut. That increase in buyers’ disposable income could spur demand from folks who are looking to build equity as a homeowner, rather than flushing away their savings in rent.

“Buying remains the more attractive option in the long term—that remains the American dream, and it’s true in many markets where renting has become really the shortsighted option,” Vivas says. “As people get more savings in their pocket, buying becomes the better option.”

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