How to Calculate Rent Payments Towards the Purchase of Home
People who are renting to own usually do so because their credit is not yet up to a level where they can qualify for a regular mortgage loan. During the rent-to-own period the renters are building up credit with the landlord which will be taken into account when they finally do go back to the mortgage company (usually after two or three years). If a mortgage company sees that the renter has made consistent on-time payments over a long period of time they are more likely to approve the renter for a home loan. In the meantime, a portion of the rent payments that the tenant is paying to the landlord also goes toward the purchase price of the home. In most cases, the rent payment will be about the same (or more) than what the tenant would pay if he had a mortgage on the house.
Other People Are Reading
Instructions
-
-
1
Decide on a final price for the home for sale. This price must be agreed upon in writing between the landlord/seller and the renter/buyer. For example, let's say the agreed upon sale price is $100,000.
-
2
Agree on the option fee. The option fee is the deposit that you will make towards the lease-to-own agreement, similar to a down payment on the house. This amount, which is usually anywhere between one to five percent of the sale price of the house, will be applied to the balance owed if and when you are approved for a mortgage. With a 2% option fee, the deposit will be $2,000 in our example.
-
-
3
The monthly rent that will be paid will be determined by the seller and is usually based on the market rent in the area. Multiply the amount of the rent payment by the length of the option period in months, add that to the option fee, and deduct that total amount from the agreed upon selling price. The resulting figure is the amount that the renter/buyer will be responsible for getting financed with a mortgage loan at the end of the option period. Say, for example, that the market rent in that area is $700 per month and the option period is for two years. Add the rent paid, which is $700 times 24 months ($16,800) to the deposit of $2,000. The total is $18,800 paid into the house. The total amount that will be financed at the end of the option period will be the sales price of $100,000 minus $18,800, which equals $81,200.
-
1
Tips & Warnings
In addition to making on-time rent payments, the tenant should also maintain very good up to date status on credit cards and other loan accounts.
Keep in mind that when you sign up for a rent-to-own agreement, the landlord will require a deposit from you that you will lose if you default on the rental agreement. If you are renting a home in hope of purchasing it, examine your rent-to-own agreement closely. Beware of sellers who are structuring the deal so that it is nearly impossible for you to complete the option period. Also, depending on the agreement, the seller may or may not choose to charge an additional maintenance fee, interest cost, or other rental costs to be deducted from the rental payment that will not be applied towards the purchase of the home. You need to be fully aware of any costs in your agreement.
