We all know that the mortgage crisis came about partially because home mortgage loans were extended to home buyers who shouldn’t have purchased. But their credit scores were not the only reason. More to the point was their income, and the reasons why their credit scores were so poor.
Today, we have consumers with good incomes and responsible payment histories whose credit scores have tumbled because of actions taken by the big banks. That included closing credit accounts that were unused and reducing credit lines for consumers who had wisely used less than half of their available credit lines.
Thus, thousands of potential home buyers who once enjoyed high credit scores and could have qualified easily are now being turned down for home mortgage loans.
But those consumers don’t have to wait to secure a home. They have another option to consider: Rent to Own
It’s true that their choices will be limited – bank owned properties won’t be sold this way, nor will short sale homes.
However, they can probably rent to own a home with a mortgage, so the real qualifying condition is that the seller doesn’t immediately need his or her equity from the sale.
Rental properties and second homes are good candidates for a rent-to-own contract.
The rent to own contract nails down the eventual purchase price, which could be a bonus for a buyer in an appreciating market. It also states how much of the monthly rent will be credited toward the purchase, and the final purchase date.
It does carry some risk for the seller, because the “tenant” can decide to opt out of purchasing. But in the meantime, the tenant will be responsible for all upkeep on the house, freeing the owner from that responsibility.
Usually the tenant will make a larger than normal deposit upon taking possession of the house. This may also apply to the down payment at closing, and will usually be forfeited if he or she doesn’t complete the purchase.
The closing date should be set far enough out to allow the buyer/tenant time to improve his or her credit scores and qualify for a home mortgage.
And there lies the second risk for the seller. If the buyer fails to raise his or her credit scores during the rental period, the seller will either have to extend the closing date or evict the tenant.
This eventuality should be addressed in the contract – which should be drawn by a real estate attorney.
Author: Mike Clover
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