Rent-to-Own: How to Find Rent-to-Own Homes NOW While Rebuilding Your Credit. Wendy Patton
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more could I ask for?” All of that is true; however, there is just one teensy-tiny problem. While this housing slump is making it tough for home sellers, there is a balancing factor that’s making it tough for home buyers. I call it the “Credit Crunch”.
How the “Credit Crunch” Affects You – the Buyer
With the severe tightening of the mortgage lending industry, buyers are having a harder time getting mortgages. The subprime mess we’ve all heard about means that many buyers who could qualify for mortgages before are no longer able to. This may be your situation.
During the “Boom Years,” lenders were putting buyers into Adjustable Rate Mortgages, or A.R.M.’s, meaning their interest rate would be adjusting after the introductory period, thereby increasing (possibly decreasing, but not likely) their payment. They did this because the buyer couldn’t qualify for a standard mortgage or even if he could qualify, he couldn’t afford the payment because the interest rate on the 30-year fixed mortgage was so much higher. These adjustable rate mortgages are one type of a subprime loan.
The lenders reasoned that it was okay to give buyers these loans because home prices were appreciating so rapidly. The thought was that by the time the new homeowner’s mortgage was getting close to adjusting upwards, the home would have appreciated enough that the owner could refinance into a conventional fixed rate mortgage.
Unfortunately, the rapid appreciation didn’t continue forever and the homeowners discovered that not only could they not refinance their loan into a fixed rate, but they also could not afford the payments when their current loan adjusted upwards. The resulting impact is the highest number of home foreclosures in our nation’s history!
With so many loans going into foreclosure, a number of smaller lenders went bankrupt and some of the larger lenders have stopped writing mortgages altogether. The lenders that continue to provide loans are being much more conservative, instituting much stricter guidelines, resulting in a serious “Credit Crunch”.
This “Credit Crunch” directly impacts you as a potential homebuyer. Unless you have A+ credit or a very large down payment, getting a mortgage may prove difficult. If you haven’t already spoken with a mortgage broker, you should do so to find out if you can currently qualify for a mortgage. If you have already spoken with a mortgage broker and you know you can’t qualify yet, you know about this “Credit Crunch”.
Many would-be buyers despair after talking to a real estate agent and a mortgage broker who tell them that they can’t help them because they can’t qualify right now. This is why you, as a buyer, would need to do something like rent-to-own. It gives you the opportunity to get into your future home now, before you can qualify for a mortgage.
Yes, you do have several choices when it comes to buying your new home! Obviously, this is the part where I sing the praises of rent-to-own.
Rent-to-Own, your Lifesaver in a Drowning Market
While most other buyers are drowning in the “Credit Crunch”, you have a choice. Renting-to-own can allow you to buy your next home, even at a time when financing is so hard to obtain; but that’s not the only advantage it offers. Let’s take a look at some of the reasons why rent-to-own can be beneficial for you:
1.Flexibility. This is key. If you live in an uncertain market, you have the ability to get into your home now and still have the flexibility whether or not you want to buy. For most of you, buying is what you truly want and should plan for. Not buying is your “get out of jail card” if things don’t go well for you personally. Don’t go into a rent-to-own without being serious about purchasing the home.
2.Time. The rental period gives you time to improve your credit score and pay off some other debts or save more towards a larger down payment. It’s very important to take advantage of this time by taking the proper steps. We will discuss credit repair in more detail later in the book.
3.Option Credits. One important negotiating point is having all or part of your monthly rental payment count as a credit against the final purchase price. This is called an Option Credit, and it can be an excellent way to increase your down payment and equity in your new home. For instance, if the rental payment is $1,200 per month and $600 of that gets applied towards buying the home (your option credit), you will build up $7,200 of equity for one year ($600 X 12 = $7,200). This will be covered in much more detail later in this book.
4.Sweat Equity. If you are a handyman and want to buy a fixer-upper home on a rent-to-own basis, you can build Sweat Equity in the home by making improvements while you are a renter. Once you purchase the home, these improvements will increase the appraised value of the home in comparison to your contracted purchase price. Having an equity spread (the home is worth more than you are buying it for) can be very helpful when you are obtaining financing. You will also want to consider asking the seller for option credits if you do certain repairs. For instance, if a repair is worth $3,000 but you can do it for $800, consider asking for a $3,000 credit from the seller. This would give you $2,200 in real value for your work, or sweat equity.
My Market Isn’t Drowning; Can I Still Buy a Rent-to-Own Home?
If you live in a stable market or even a seller’s market, it is still possible to buy a rent-to-own home. Although, in a seller’s market it can be a little more challenging because there would be fewer sellers willing to consider selling their home on a rent-to-own basis. I have done rent-to-own deals and taught people to do them in all kinds of markets. Don’t let the fact that you live in a seller’s market intimidate you from trying. If you do live in a seller’s market, that means homes are appreciating in value; so by locking in a price now, your new home will be that much more valuable when you actually buy it. In Part 2 –“How to Search for a Home” we will go into detail on how to find your rent-to-own home. These techniques will apply to seller’s markets as well as buyer’s markets.
A Special Note about Working with Real Estate Agents
Most buyers work with real estate agents when it comes to finding a home. This is just smart practice because they can guide you through the home buying process and help you avoid many pitfalls along the way. Not to mention the fact that in MOST cases, the seller is the one paying the agent’s commission, so you don’t have to pay them anything for their help. According to the National Association of Realtors’® “2007 Profile of Home Buyers and Sellers,” 85% of sellers received assistance from a real estate agent when selling their home. Think about that -- 85% of the homes for sale are listed with real estate agents! Unless you want to limit yourself to just 15% of the homes on the market, you’ll need to work with an agent to find your new home.
A common mistake that many buyers make is in directly contacting the listing agent of a home they are interested in because they think that this is the only agent that can show them the home. The problem with this is that this agent represents the seller, not you. He will be all too happy to show you the home and handle the transaction because it means he is getting both sides of the commission, but that doesn’t change the fact that he isn’t representing you.
Instead of contacting an agent whose name is on the sign listing a home you are interested in, go to a local real estate brokerage and ask to speak with a BUYER’S AGENT, or you can email my office at [email protected] and I can give you the name of a buyer’s agent in your area who is familiar with rent-to-own (most are not). A buyer’s agent’s job will be to represent YOU, not the seller. Your agent will still be paid their commission by the seller. Your buyer’s agent can show you any home that is listed on the market, even if it’s listed with another agent.
Even though you want to buy your home on a rent-to-own basis, I recommend that you make