Hello Janice,
I’m just following up on our interaction regarding rent 2 own.
In your application you indicated an income of $80,000 per year, for which I could qualify you for about a $360,000 property. You indicated that you were looking for a townhouse in the $300,000 range and that you had an available deposit of about $17,000. So this all looks doable.
You mentioned that you’d checked into getting a mortgage at your bank, but had been declined because your credit score is only 550. That makes sense, because you typically need a score of at least 670 to get a 10% down mortgage, and well over 700 to have a chance at qualifying for a 5% down mortgage.
I indicated that this is exactly the type of situation in which we can help you. Typically, we avoid the 5% qualifying threshold because that is just too precarious and we don’t want to set up anyone for failure at the end. So, we aim for the 10% down threshold, plus you’ll need closing costs of about 1.75% saved up.
I quizzed you a bit about what was on your credit report, but you didn’t know. I would need to see it, to make a fully informed assessment but, generally, with good guidance and coaching, which is an integral part of our program, and if you work hard at it, you should be able to reach 670 in two years.
However, I suggested we should maybe consider a three-year program instead, because of the amount you will still need to save up to reach 11.75% savings by the end of the term.
The savings account is a combination of your initial deposit, plus a monthly amount that grows the account to the required level by the end of the term. So, your monthly rent is really made up of two components: base rent, which is normal rent that we would, like any other rental situation, use to pay our expenses of mortgage, taxes, insurance and return on our investor’s investment; and the credit component, which builds up your savings account.
I gave you the example for the $300,000 property you seek: base rent would be $1740 per month. That is about what you would pay to rent a townhouse of $300,000 value. At the end of three years, you will need a savings account of about $39,000. Since you are starting with $17,000, you will need to add $22,000 to your account or about $610 per month, to reach that total over three years. Therefore, your total rent would have to be $2350.
You said that was way beyond your ability to pay every month and could not consider it. You said you would rather fix your credit yourself and then buy outright when you got there.
Let’s take a look at this logic. First, you’re paying $1450 now for a 1-bedroom condo. If you were already renting the 2-bedroom townhouse you want, you would be paying about $290 more. If you want to buy that townhouse in three years, you will likely pay at least the $332,600 I quoted you, possibly a lot more, given the way prices are going these days.
But, let’s say you would get it for $332,600 in three. You will still need $39,000 down, so you will still need to be saving $610 every month between now and then. Can you do that on your own, without the incentive of the forced savings component? Maybe you can; many people can’t. Would it be easier if it was a “forced” amount?
Then, there is the matter of bringing your credit up by yourself. Are you educated with all the nuances of the credit bureau algorithms? Did you know that they are always being adjusted? Do you get these updates?
From my experience, almost no one will be able to bring their score up to where it needs to be on their own. I predict that, unless you are unusually informed, diligent, and responsible, you will neither have the $39,000 saved up over three years, nor will your score be high enough. But, maybe you are an exception to the norm.
On top of that, you will be living in your 1-bedroom condo instead of the townhouse for these three years.
So, the bottom line: for $290 per month, you get credit coaching, you get to live in the townhouse for three years instead of your condo, and you have your future buy-out price guaranteed. Is that worth it?
Maybe it is, maybe not. You will have to decide.
