I've had a lot of questions about renting to own so I thought I'd post a little bit about how a model rent to own program works.
Rent to Own Basics
Rent to Own is simply where you buy the property from the property owner under a
private contract and the owner acts as a financial institution, just like a bank. If you have a
10% to 15% down payment, you can get the property without going through the
traditional qualifying and loan approval process.
the owner will give you a residential lease with the option to purchase the property at a
specified price at any time during the lease period. Each payment you make will
reduce the principle which you owe, just like a standard mortgage amortized
over 15 or 30 years. However, unlike banks, most owners are not in business of providing permanent financing, so wthey can finance you only for a short term, to help you jump from renting into home-ownership.
Most payments are set up based on a 30 year amortization schedule,
but the standard rent to own arrangement would be for 1-5 years. At the end of that term
you will have to obtain a replacement loan from a traditional lender. And again at
that point you would go for a "refinancing" loan, which should be easier & less
costly to get than a "new purchase" loan, assuming you kept your credit straight
and made payments on time.
Frequently Asked Questions:
1. What closing costs, fees and points should I expect to pay? Many people charge a loan processing fee of $100.00, a document preparation fee of $150.00, a credit check fee of $20.00, and an origination fee of 1% of the loan value for handling the owner-financing transaction. However, all such fees are wrapped into your loan, so the only out-of-pocket money you will need to pay will be the down payment. Also, you will need to pay for the 1st year insurance premium to have the home insured against damages. As you can see your total closing costs are a few hundred dollars, so you're not wasting thousands of dollars like in a traditional purchase.
2. Is there a prepayment penalty? No, you may pay this loan off at any time with
3. What interest rate will I be charged? Depending on your credit score and other
indicators of creditworthiness, owners will charge from 4.5% to 8.5% above prime
rate. With prime rate at 5.25%, the rates would be between 9.75% and 13.75%.
4. What if I have 15% or more to put down? With a higher down payment, you can usually get
financed at lower interest rates.
5. What if I don't have 10% down payment? The standard down payment is
10%, but if you have other collateral many owners will work with you to help you become a
6. How quickly can I get approved and move into the house? Typically within 2-3 business days.
7. Do you do a credit check and what happens if I have a bankruptcy or other
credit problems? Yes, credit check is done in most cases. But things like
bankruptcies, collections, being turned down for a bank loan or other credit
problems are usually not a problem. If your credit is extremely bad, you can still get approved but it may require you to pay a slightly larger down payment.
8. What happens if I don’t qualify for a bank loan at the end of the term?
If, during the term of the agreement, you were late on your payments, or other
credit accounts, if you incurred additional debt, or jeopardized your loan in some
other way, you were not making a serious effort to get ready for the purchase.
Therefore, many owners won't give you a second chance.