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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.