This option allows you to control the real estate through legal agreements while you work on rectifying any issues needed for successfully qualifying for a mortgage. So how does rent to own really work?
Susan came to me recently to apply for a mortgage but was unable to qualify. She did not have the credit and the down payment required. Her credit history included a consumer proposal, which would require 2 to 3 years to recover. Also she needed $20,000 to make the minimum down payment. There are several companies and private individuals offering Rent To Own (RTO) programs and Susan was able to negotiate terms and price that would mutually benefit her and the property owner.
Because Susan was able to demonstrate an income level to pay the carrying cost (principal, interest, taxes and insurance) of the house that she was planning to buy for $500,000, an investor partner Adam was able to buy the house on Susan’s behalf and set up a legal agreement that allowed Susan to pay all the carrying costs in the form of a lease. Also, Susan pays additional money to accumulate the down payment for her buying the house after 3 years at a price of $580,000. It must be noted that the projected value of the house after 3 years based on historic trend in the area is $620,000. This means that difference between the price agreed upon in the RTO agreement and the market value is $40,000 in equity to Susan.
Key Impact on Susan’s Economy:
1) Lease: $2,500 to cover the carrying cost (mortgage, tax and insurance)
2) Deposit: $10,000 initial lump sum towards down payment
3) Additional Down payments: $530/mo (total $20,000 over 36 months)
4) Potential gain of $40,000 in equity growth over years
Susan’s outflow per month is $3530/mo and she has the right to buy the house any time within 3 years providing she meets the mortgage qualification requirement. Because she has the income to support it and working with her team of advisors to maintain her contractual obligation, Susan was able to take ownership of the house within 26 months instead of the full 36 month term. Note that at no time within the 36 month term of the contract can the house be sold to anyone other than Susan without her relinquishing her rights to buy first.
Although the RTO option has lots of value and benefits to people like Susan, you will need a trusted advisor like Your Mortgage Advocate to assess your situation and prepare you for successful qualification of a mortgage to take over the property within the term of the RTO contract.