I am seeing an increasing number of calls, emails, and social media posts from people seeking rent to own situations. I understand that home ownership is the desired goal, and these situations sound promising for people with credit challenges. Let's take a closer look at what this actually means.
Rent to own means that the seller of the property is financing the property himself. He/she becomes the lender and holds "the paper" if you will.
What kind of seller can do this? It is one who owns the property outright with no mortgage usually. He can charge a higher rate of interest and most likely will not finance it for a traditional period of time; i.e., fifteen, twenty, or thirty years. Let's face it. Life happens. Life is uncertain. It's a big gamble for a seller to finance for long periods of time.
What does this mean for a buyer? It means that you better have a good real estate attorney review your contract and mortgage documents to be sure they are structured to protect you. Is there a provision for an escalation in your interest rate if you are a day or two late with your payment? Is there a demand clause for full payment of the loan if you are late with a payment? Can you be evicted if you miss only one payment? What happens if the seller dies? What if the heirs want payment in full? If not, who receives the monthly payment? Can you make changes to the property? Can you sell it to someone else and pay the seller off? Can you pay the loan off early with no penalty? Can you refinance?
The point of this is a rent to own arrangement may not be quite the thing for you after all. It may be better to consult with a reputable lender who will take the time to counsel you as to the exact steps you need to take to improve your credit in the fastest manner possible. DO EXACTLY WHAT THAT LENDER TELLS YOU TO DO TO THE LETTER!!! Then honor that lender's time and effort with you by giving him your business when he gets you to the point you qualify for a mortgage. He shouldn't charge you for the advice, so he gets paid when you close on a house through him.
As always, LET THE BUYER BEWARE! Rent to own sounds like the thing to do to get you in a house now, but there are pitfalls. Educate yourself. Consult with reputable REALTORS, lenders, and real estate attorneys. Protect yourself and your family.