Rent-to-Own Changes Make Homebuying Easier
A rent-to-own agreement can be an attractive option for buying a home, particularly if you have weak credit or limited funds. But how to find rent-to-own homes?
Sometimes it can be as straightforward as asking your landlord if they'll sell the house.
With rent-to-own properties, you may make a deal where your rent payments go toward building equity over a number of years. That gives you credit toward a down payment, plus gives you time to improve your credit score so you can qualify for a mortgage when the lease is up, if you decide to buy.
But instead of individual landlords, some multi-million dollar companies are getting into the home finance industry and offering rent-to-own programs of their own. They’re changing how homes are bought, even though these programs aren't meant for people who qualify for traditional home loans
Buying a home in a tight market
Based in San Francisco, Verbhouse calls itself “an alternative home finance platform” that offers “an evolutionary path” to homeownership through a lease-purchase option.
Like other programs, Verbhouse isn’t meant for someone who can qualify for a home loan elsewhere. If clients can get a mortgage on their own, they should, says Marjorie Scholtz, founder of Verbhouse.
The company is starting in the San Francisco Bay Area, one of the most difficult housing markets to get into. Part of its target audience is San Francisco workers who are tired of paying high rents. They have a good income, but may not have a high enough credit score to qualify for a conventional home loan.
A borrower’s real estate agent and Verbhouse work together to find a home the borrower wants, and Verbhouse buys the house and leases it to them. They have the option to buy the home within five years from Verbhouse at 10 percent more than the purchase price, building equity through a down payment of around 7 percent and monthly lease payments that are about what they’d be paying in rent, according to Verbhouse.
The buyer pays a refundable lease deposit, but doesn’t pay property taxes, insurance or for maintenance during the lease. Verbhouse pays those costs.
Lease with option to buy
Another company, Home Partners of America, doesn’t offer a mortgage directly to rent-to-own buyers, but offers what it calls a Lease with a Right to Purchase program.
Buyers don’t build equity while leasing rent-to-own homes from Home Partners of America, but they get the option to buy the home within five years at a set price, says Tim Brown, a company representative. They're only required to lease the home for at least a year.
The program is meant for people who have plenty of money and can afford a home, but have difficulty getting a mortgage loan because they’ve had a bankruptcy, are newly divorced, have student loan debt or other hardships they’re trying to overcome, Brown says.
A down payment isn’t required, only a $75 application fee and two months security deposit. Though they’re not building equity, this rent-to-own program allows people to live in an area with good schools where finding a home to rent may be difficult.
To help get the best-qualified buyers, Home Partners of America allows up to 45 percent of a renter’s income to go toward rent, minus their revolving debt such as car payments and credit card bills, Brown says.
“This is not for somebody who is barely getting by because they can’t afford a down payment,” he said.
Credit repair is part of deal
Pre-Property Solutions in Massachusetts offers a rent-to-own program where the buyer puts down 3 to 10 percent of the home's market value price. The company then connects the buyer to a third-party credit repair consultant who works with them to repair their credit.
Typically, the buyer is able to qualify for a conventional mortgage within nine months to five years, says Chris Prefontaine, the company's managing director.
During the credit repair process, a portion of the rent payment is often applied toward the purchase of the home, Prefontaine says.
The direct way
Of course, there’s always the rent-to-own option of working directly with your landlord, as travel business owner Michelle Roberts of Stockbridge, GA, did with a house she has been leasing for a year.
After getting divorced and having too many family bills fall her way, Roberts, 50, needed a little time to rebuild her credit so she could qualify for a home loan. With six other family members relying on her for housing, she’s leasing a six-bedroom, four-bath home for $1,750 per month for another year with the plan to buy it from the owner.
Her rent isn’t earning her equity in the home, though she is guaranteed a set price. Because home prices have dropped in her area, her landlord recently dropped the purchase price from $300,000 to $269,000, she says.
Stockbridge says she’s using the two years of renting as time to improve her credit score by 150 points to at least 750 so she can qualify for better loan terms at her credit union.
“It was basically to get our credit and everything together so we could buy the property,” she says.
After making a 10 percent down payment, she expects her monthly mortgage to be about $1,200 when she buys the home, or about $550 less than her monthly rent. Along with having a large tax writeoff, that’s one of the main benefits of owning a home, she says: lower costs each month.