Unlike the standard home-buying process, when you are applying to rent a home with an option to purchase it, the standards for qualification are solely those set by the property owner, as opposed to a federally regulated bank. The qualifications, then, can be whatever the owner wants them to be. This can work both for and against the tenant/buyer.
What Is Rent to Own?
Rent to own, also called lease to own, lease purchase or lease to buy is a method of renting and selling a property in which a prospective tenant signs an agreement with a property owner that is both a lease and an option to purchase the property. Usually, the contract defines a specific and limited period of time in the future during which time the tenant can exercise the option to purchase the property. Once the option period expires, the tenant loses the right to purchase the property. Such agreements often require the tenant to pay an option fee to the property owner. Sometimes the rent is higher than market-rate rent, and some portion of the rent is allocated to a down payment on the house. The contract may state that neither the option fee nor any down payment is returned if the option is not exercised.
Just as a landlord decides what qualifications a prospective tenant must meet, the landlord/property owner decides what qualifications a tenant to whom he is selling an option must meet. In an article examining the darker side of rent-to-own housing -- "Is Rent-to-Own a Scam?" -- MSN Real Estate suggested that some landlords actually look for prospective tenants who could never meet mortgage lending qualifications and for situations that would result in eviction. The landlord, then, is free to move on to the next applicant, collecting serial option fees and down payments multiple times on the same property.
Why Other Qualifications Are Important
It's important to understand the qualifications for a home mortgage before you sign a lease-to-buy contract because, although you do not have to apply for a mortgage before you enter into the lease-to-buy contract, you will in order to exercise the option. If you can't meet the qualifications for a mortgage before your option expires you will lose it along with any down payment and option fees you've given the owner.
Home Mortgage Qualifications
While every lender has its own mortgage qualification standards, there are some general rules of thumb. First, many lenders require borrowers to be able to pay their mortgages, property taxes and insurances, referred to as PITI, with 30 percent of their gross salaries. Second, they expect a borrower's total monthly debt, including credit cards and housing costs, be no more than 40 percent of his income. U.S. News and World Report suggests you will need a credit score of at least 730 to get a competitive interest rate on a mortgage and that a credit score under 600 might leave you without any mortgage. Finally, most lenders require a down payment, which might range from 3.5 percent to 20 percent of the purchase price.
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