It?s not easy to buy a home in the U.S. these days. In 2010, Zillow estimated that a third of Americans didn?t qualify for home loans because of their credit. Two years later, it?s still nearly impossible for someone with a low credit score to buy a house. Americans with average credit scores don?t have it much easier. The ridiculously high mortgage rates they?re offered make investing in real estate seem impractical. Advertisements for 15-year mortgages with 3% interest rates are fixtures on real estate sites, but only a small percentage of people with really, really good credit qualify for such low rates.
Mortgage lenders are justified in being cautious. America hasn?t recovered from the subprime mortgage crisis, which was a result of a blatant lack of discretion on the part of everyone involved in real estate transactions. Six years ago, lenders didn?t blink an eye before handing over the keys to a McMansion. Now they pore over credit histories and financial statements, looking for reasons to turn down potential homebuyers.
Until lenders strike a balance between excessive caution and recklessness, people with everyday credit scores will have to stomach high interest rates or put off buying homes until their credit scores improve. A minority of potential homebuyers may also consider options like rent-to-own real estate.
If you?ve ever perused the real estate section on sites like craigslist, you?ve probably seen advertisements for rent-to-own housing. These advertisements often promise to put you on the fast track to owning your own home, regardless of your credit score.
How rent-to-own real estate works is relatively simple on the surface. You pay an option fee of a few thousand dollars and agree to pay a seller rent for a certain number of months, while you live in the home that?s for sale. You and the seller agree on a selling price for the home, which you expect to eventually take out a mortgage to pay. The rent you pay each month is a little bit more than what you would pay for a rental property. This is because a portion of the monthly rent for a rent-to-own property goes toward a down payment.
If everything goes according to plan, you end up with a nice down payment set aside when it comes time to apply for a mortgage to buy the home. The catch is that there?s no guarantee you?ll get approved for a mortgage with a reasonable interest rate or get approved for a mortgage at all, even after dutifully paying inflated rent for several months.
The major pitfall of rent-to-own real estate is that sellers want to make a profit. Oftentimes, the way they can make the biggest profit costs buyers.
?Rent-to-own ties up properties. If a rent-to-own house goes up in value before it?s sold, it?s not good for the seller,? said Richard Schulman, a real estate agent in Los Angeles. ?Sellers usually only enter into rent-to-own arrangements when they think they can profit from them.?
Sellers make the most money off of rent-to-own arrangements when plans fall through and they get to keep your down payment and option fee.
?After buyers pay rent for the pre-established number of months, they still have to apply for loans. They?re not always approved. When they?re not approved, they don?t get their down payments or option fees back. The sellers keep the money. A lot of times sellers do rent-to-own in low-income neighborhoods where they know buyers won?t get approved for loans,? Schulman said.
You can also lose your down payment and option fee if you violate any of the terms of your contract with a seller. Something as simple as paying rent a few days late could cost you your money and future home. On top of that, if a seller loses the home because he or she neglected to make mortgage payments on it, you could lose out on the home too.
Signing a contract to rent-to-own a home doesn?t mean you?re signing a contract that guarantees you home ownership, and unscrupulous sellers are aware of this. Rent-to-own real estate doesn?t always end badly for buyers, though.
According to Schulman, ?There are certainly legitimate rent-to-own operations and honest sellers. If someone has poor credit now but believes they will qualify for financing in the future, it could be a great opportunity. What matters is being able to get financing to close the transaction.?
Being able to spot and steer clear of unscrupulous sellers will help you avoid rent-to-own disasters. As with most things, if it sounds too good to be true, it probably is. If someone tells you your credit and financial standing will have no bearing on whether or not you get approved for a mortgage in the end, be wary.
There are a number of examples of rent-to-own scams on sites like scam.com and ripoffreport.com. Make sure you search for rent-to-own real estate companies on these watchdog sites before you sign any paperwork, and trust your instincts.
?When someone calls me and asks about renting-to-own, I ask them if they think they?ll be able to qualify for a mortgage in the near future. If they don?t think they will, I recommend they take the time to build up their credit and eventually purchase a home the traditional way,? Schulman said.
Before you invest in rent-to-own real estate, remember that there?s no quick fix for a low credit score. Building up your credit often takes time. Luckily, the house of your dreams will be worth the wait.
Source: http://www.cmn.com/2012/12/the-truth-about-rent-to-own-real-estate/
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