The Biggest Mistake to Avoid with Rent to Own Homes
We’ve talked about rent to own homes a couple of times before. With a rent to own home, typically a renter signs into an agreement with the current owner of the home that they will rent the property for a short while, before purchasing the home outright. While renting, the renter pays a small percentage towards the mortgage; this will later be used as their down payment. Another, larger portion of the amount paid monthly will be a rental portion.
Rent to own agreements can be complicated, or they can be pretty simple. That will be determined by what type of property you’re considering, your current situation, and the current situation of the homeowners. But, because it’s the renter that does stand to lose in the end, many are wary about entering into these agreements – and for good reason! Not only are there a few scammers on the market looking to take advantage of people in an already-bad financial situation, there are also some mistakes that can be made – and they can be costly. And while there are a few common mistakes, the biggest one by far is failing to begin credit repair right away.
Typically the reason renters enter into rent to own agreements is because they don’t have the down payment or good credit needed to obtain a mortgage the traditional route, through a major, second-tier, or even private lender. Instead of throwing money away every month for rent, a portion of it is saved for a future down payment that can be put towards a mortgage. In the meantime, they should also be working on repairing that credit that kept them from getting that traditional mortgage, and this is where many renters fail.
That’s because renters are only given a certain amount of time wherein they can be paying money for rent, while still putting money towards their down payment. Once that time period is up, they must make a decision whether to go ahead and buy the home, or walk away from the deal. If they walk away, they forfeit all funds – including those saved up for a down payment. That’s not a mistake, as some find they no longer love the home or are forced to relocate for employment reasons. But, if the renter still wants to buy the home, but hasn’t done a thing to fix their credit, they still won’t be eligible for a mortgage, and they still won’t be able to buy that home, or any other. Then they’re right back at square one.
If you’re thinking about entering into a rent to own home agreement, especially if you’re using that route because your bad credit is preventing you from getting a mortgage any other way, you must have a plan for credit repair before you even move in. Tally up all your living costs, and all your past and current debt, and work out a budget that includes debt repayment and credit repair. Only then will you be well on your way to actually owning that home one day, instead of just thinking about what could have been.