Rent 2 own is a brilliant solution to get people into home ownership, specifically, for those who can afford a mortgage but can’t qualify for a bank loan. (If you already qualify, then you don’t need rent 2 own.)
Rent 2 own allows you to qualify for the program under less stringent standards than what the mortgage lenders require. The important word there is “program.” A rent 2 own program cannot qualify you for a “mortgage” under less stringent standards. The program only buys you the time to close the gap between where you are now and where you need to be to qualify for that bank mortgage. At the end of the day (the rent 2 own period), you still need to reach bank qualification standards.
The other thing a rent 2 own program does is, it assists you in closing that gap, whatever the issues are. There are three main situations in which a rent 2 own program can assist you in getting from where you are today, to where you need to be to get a mortgage.
When Rent 2 Own works
The first is when you don’t have enough down payment. In most cases, you need a 10% down payment to get a mortgage. (There are still the “gold star” candidates who qualify for 5% down, but that is rare and difficult.) In addition, you will need about 1.75% for closing costs: land transfer taxes, lawyer’s fees, inspections, appraisals etc. So, in most cases, you need to have 11.75% saved up to qualify for a mortgage.
In our rent 2 own program, we’ll start you off with only 5%. Then, we build into your monthly rent an extra “rent credit” component that grows your savings every month until you reach 11.75%.
The second situation is when your credit score is too low to qualify for a mortgage, or when you do not have established credit, at all (like if you are new to the country, or, for whatever reason, have never established your own credit.) Whether it’s bad or non-existent, it can usually be fixed to acceptable bank standards within about three years. This is true even if you have been through a bankruptcy, so long as it has already been discharged.
The good news is that credit coaching is an integral element of any credible rent 2 own program. The program provider, or a designated credit coach, will meet with you regularly to monitor your score and to advise as to what you need to do to improve it further. Of course, the onus is still on you to take action; the coach cannot improve your score for you. But, if you follow the advice of the credit coach, you will see your score rise to the point that it meets bank standards.
The third situation in which rent 2 own works well is when you don’t qualify due to an insufficient or unstable work history. This is especially true if you are self-employed. Because your income isn’t guaranteed by some larger organization, you need to show the banks extensive records to convince them that you are able to consistently earn enough income to qualify for the mortgage. It is also true if you are just starting out in the workforce or have just had a significant change in job status.
A rent 2 own program buys you the time to demonstrate an adequate ability to earn the requisite income so that you can show the banks a credible and stable income history.
Another piece of good news: if you need rent to own for more than one of these reasons, or even all three, they can all be worked on simultaneously. In most cases, three years is adequate; in some it can be done even quicker.
When Rent 2 Own doesn’t work
There are some scenarios, though, when a rent 2 own program will not work for you.
If you do not have any deposit or only very little, a rent 2 own program will not work. This is for two reason: First, no rent 2 own program would take on the risk of a client who had no “skin in the game.” What incentive would there be for the client to take the program seriously? It would likely be a failure and both the program and the client would get stuck with an ugly situation in the end.
The second reason is that the savings component required to reach 11.75% over the course of the term would be so huge, almost no one could afford it. Imagine if you were purchasing a $400,000 home (if such still exists in this area.) You would need a savings of $47,000. On a three-year term, you would have to add $1305 to your rent each month to get there. Who could afford that?
Another situation in which a rent 2 own program won’t help you is if you’ve been through a bankruptcy that included real estate. While it may take only three years to build your credit back up, the fact that you’ve already defaulted on real estate once will be a big red flag for the banks. They won’t take a chance on you a second time. In such cases you will normally have to wait at least seven years—i.e., until your bankruptcy falls off your record—to become eligible for a mortgage. Unless you can find a rent 2 own provider who will do a 7-year program, which is unlikely, you will be without luck until you get closer to the end of that period.
The third scenario in which a rent 2 own program won’t help you is if you’ve had more than one bankruptcy. Lenders are quite forgiving of one bankruptcy, as mentioned above. But a second one reflects a pattern that the banks will take a hard line on. Normally, after a second bankruptcy, you will have to wait fourteen years before qualifying for a mortgage. A rent 2 Own program won’t help you change that, and if any rent 2 own operator offers you a fourteen-year program, run, because no one can project that long into the future to set you up for success. Las Vegas would likely be less of a gamble.
Always make sure when you engage a rent 2 own program that you understand all the issues and are being set up for success!
– Edward Everett Hale
