Many people dream about owning their own home but don’t feel they can afford it, for various reasons. It can be a considerable commitment to scrape together a down payment and all of the legal and closing costs involved in buying a property from a seller.
In addition, people might be deemed a credit risk for various reasons, which means it could be difficult to get an affordable mortgage, homeowner’s insurance, and so on. They might also have unpredictable income due to working for a commission, for example, making them seem a greater risk to the bank they have applied to for a mortgage.
One recent idea for increasing the probability of home ownership to those who might not otherwise qualify is the “rent to own your home” offer. The principle behind it is that your monthly rental payments won’t just be rent, or “dead money” as some people call it, but a payment towards equity in the house – with a view to paying off the full price of the home and eventually owning it outright. This can sound like a dream come true, but as with all things, it is a case of buyer beware.
A Typical Rent-to-Own Agreement
In a rent-to-own deal, the person or company that owns the home you are interested in agrees to sell it to you in the future for a specific price. The rent you pay every month is counted toward your future down payment on the house.
However, these deals can be risky, and even complete scams, for a number of reasons. There are several main issues to look out for:
- The “seller” doesn’t really own the property
Some people are renting the home themselves, and would only be subletting to you. Or they have keys and access to the property, but no right of ownership.
- The owner hasn’t paid property taxes
This can mean your payments get eaten up, giving you a lot less equity in the house and making it take much longer to pay it off.
- The owner is not allowed to sell it
There can be a number of reasons for this. They might not be paying taxes and have a lien on the property. It might also be in a designated flood zone and thus have restrictions on it being sold.
- The house is in terrible design, or has issues like lead or asbestos
This will cost you a great deal in the long run and of course, is a grave health concern. A full home inspection should be carried out before ever considering a rent-to-buy deal.
- Promised repairs are never done, ever after the contract is signed
The smart thing to do is not commit until the fixes have been completed and the house passes inspection.
- The house is in foreclosure
The person trying to “sell” you the home does not actually own it because they have failed to pay their mortgage and the bank is in the process of reclaiming their property.
- They back out of the agreed-upon price, especially when you are nearing the end of the payment process
Not everyone keeps their end of a deal. Then you feel stuck and of course are not willing to walk away because you have already paid in so much. If you’ve done things “on the cheap,” chances are you did not consult with a lawyer, and might hesitate or not have the money to hire one to defend your rights in course.
- Their terms are unduly harsh
Some will negate the deal if one payment is missed.
Bottom line: Look for ways to boost your credit and save for a down payment so you will be eligible for a mortgage and be able to afford the house you really want, and not get scammed into a deal just because you think it is all you can afford.