How to Own a House Without Enough Savings for a Down Payment
Updated: Apr 3, 2020
This is an article “How to Own a House Without Enough Savings for a Down Payment” by Marc Primo.
For people who are tired of paying rent for a house that they can never own, the prospects of being a certified property owner will always be a dream they’ll never stop pursuing. However, most renters find it too difficult to save up for a down payment given that a huge chunk of their income goes to rental payments instead. Fortunately, there’s a way to go around this problem even though you’re short on the dough.
The concept of rent-to-own has been around in the United States since the 1950’s when pioneers such as Charles Loudermilk, Sr. adopted a business model by renting out Army surplus chairs. By the 1960’s the alternative to leasing and eventually owning property had taken off and given birth to the Association of Progressive Rental Organizations (APRO) in 1980-- a non-profit trade organization that acts as a representative of the entire industry to the US Congress, the Internal Revenue Service, and other public institutions.
Today, the industry is expected to further grow with over 100 million US citizens still opting to rent.
So is rent-to-own a good idea if you want to purchase your own house? Consider these facts first.
What happens when you rent-to-own?
For both sellers and buyers, a rent-to-own agreement would seem like the perfect deal. A property owner can lease out his property for say a two-year timeframe while offering his tenant the option to purchase the property after the contract. What the renter or buyer needs to consider is that there is usually a premium added to the actual amount of monthly rent if he agrees to rent-to-own the property.
For many, while the principle is that you are adding an amount which will then serve as your downpayment for when you are ready to pay monthly amortizations, the scheme is more manageable than actually saving up for an actual down payment The only difference is that you can get the option to own a house in time despite not having enough credit at the moment.
When on a rent-to-own agreement. You basically have to consider two monthly payments:
Market rate monthly rent - the fixed amount for your monthly rental fees.
Premium - additional payment that will serve as your downpayment after the contract which gives you the right to continue payments for eventual ownership of the property.
However, your premium payments should be listed apart from your monthly rental payments as it will be deducted to the total contract price of the property.
How does it work?
Before you decide to enter into a rent-to-own agreement, there are two types of leases you need to get yourself familiar with before signing on the dotted line.
Lease option agreements give you the option to buy the property once the contract for rent expires, while lease-purchase agreements will require you to immediately buy out the property after the lease. Sounds the same? Simply note that the first contract gives you an option to buy it while the other requires you to legally purchase the property.
What are the advantages?
Given these considerations, let’s discuss what advantages you can enjoy when opting to go for a rent-to-own contract. Aside from giving you some leverage to set a higher credit score, it also gives you some breathing room before you enter into a mortgage agreement. Since this might be one of the biggest purchases of your life, it would be best to take your time in setting a higher credit score prior to entering into a rent-to-own agreement. That way, you’re in a better position in terms of credit when you are ready to enter into a mortgage commitment.
Another benefit you can get out of a rent-to-own agreement is that you get a fixed price on a property even if the economy fluctuates and increases land value.
Perhaps the biggest benefit you can get out of rent-to-own schemes is that you can get your credit score up and build equity at the same time.