Everything You Need To Know About Rent-to-Own
Q: So how does the Rent-to-Own Process Work?
A: The process is fairly straightforward. Here are the steps we follow:
- First, submit a Free Online Application. Even if you haven’t found a home yet, it’s better to get this out of the way so that when you do decide you’ll be ready to take the next steps.
- Take a walk-through of the house(s) you’re interested in and fall in love with your potential new home.
- Then comes our “Next Steps” email which you need to complete and submit (no worries, it’s easy).
- Need some help with damaged credit? There’s an overwhelming number of credit repair services out there and it can be near impossible to decide who’s both affordable AND legitimate. We’ve done the hard work for you and recommend Clean Slate Credit Services. Initial consultation is FREE and many times we can get the cost of credit repair counted towards your down payment!
- Get the owner’s approval.
- Submit funds in escrow (if you haven’t done this already). The full amount of the down payment and a full first month’s rent will be due prior to moving in and can be paid at any point in the process.
- Sign the contracts!
- Meet the property owner, do a walk-through, get your keys and move into your new home!
- Need a referral on a mortgage broker? Let us know! We’re not mortgage lenders so you’ll need a great broker as your partner in finding a good home loan when it’s time to exercise your purchase option.
Q: Why should I Rent-to-Own my home instead of just saving and waiting to qualify for an outright purchase?
A: There’s a lot of great reasons to consider a rent-to-own property:
- Be In Your Home NOW! – Instead of continuing to live in a transitional home, you can have the comfort of knowing that 100% of your down payment is going towards your home purchase. Your down payment is not some extra fee, it’s actually paying for your home.
- No Pressure – Very often when you get approved for a home loan, the clock starts ticking and before long that approval is going to expire. That means tremendous pressure to find the right home in a short amount of time. Purchasing a Rent-to-Own property means taking your time to fix your credit, save for a higher down payment, and shop for a loan… all from the comfort from the home you want to buy now.
- Make The Banks Work For You – When buying a home there are so many factors that have to come together that you’re often forced to take whatever option you can get when it comes to a mortgage. Rent-to-Own means that you can enjoy your new home and take your time finding a mortgage. Now the banks are coming after you because you have the freedom to explore all the offers out there.
Q: How do I qualify to be a tenant-buyer?
A: Qualifying is simple. We take your application and verify rental history, employment, income, background, and public records. We also have a credit repair specialist review your case to make sure you’re on the right track with a timeline and game plan for getting your credit in order.
Want to make the process go even FASTER? Follow these tips:
- Send (by fax or email) copies of ALL verification of household income. Including:
- Pay Stubs
- Child Support
- Disability
- Other Household Income
- Submit a signed VOR (Verification of Rent) release form.
- Get us your credit report and credit score as quickly as possible! Either you can get this information or have us get it for you (for a small fee). If you need to work on your credit, that’s OK! Your credit consultation is free and will help establish your game plan that will help you successfully exercise your purchase option on your new home.
- Whatever funds you have available now, get them into the Third Party Escrow Account. These funds can’t be touched until you say. If you don’t get chosen for the home or change your mind, you get 100% of your money back immediately.
Q: My credit is not so great. How good does my score have to be in order to qualify?
A: Here are some factors to consider in relationship to your credit score:
- The score is not the main factor we look at. We’ve seen scores of 500 and even lower get restored to the mid-600’s in 9 months or less. This includes people with bankruptcy and foreclosures in their history! If you’re committed to a solid plan, credit IS repairable. It doesn’t happen overnight which is why Rent-to-Own is great for people with less than perfect credit.
- The main credit factor we take into consideration are the steps necessary to get you to a higher score and a level where a good loan is attainable. Every situation is different. Some credit scores can be turned around in as little as 3 months. Others will take longer.
- The good news is that we are ready to work with you and get you the guidance you need to put you on the path towards your new home. We have done the homework and found a great credit repair service to refer you to who offer a FREE CONSULTATION and can start working with you right away (click HERE to find out why we recommend New Beginnings Consultant Company). If you do the hard work, 90% of clients turn their credit around in 12 months or less. Our Rent-to-Own contracts are at least 18 months which gives you plenty of time to work towards your dream of owning a home. Even better, many times we can get the cost of the credit repair to count towards your down payment!
- Some clients will need more than 18 months to get their credit in order. Perhaps someone had a bankruptcy last year and needs at least 2 years to become lendable again. That’s OK! We will work with you to match you up with an owner who’s willing to do a longer term.
- Rent-to-Own is FLEXIBLE and CUSTOMIZABLE! That’s why it can work for almost anyone and that’s why we love it!
Q: How do I lock up a property to be sure no one else gets it first?
A: A home is not fully locked in until all funds are in escrow and the contracts are signed. It’s rare that someone is not approved because our program is so flexible. There’s a bigger risk of an applicant getting in their paperwork and funds submitted in front of you, so ACT NOW!
Q: What contracts do I have to sign to close the deal?
A: Rent-to-Own is also what’s known as a Lease-Option agreement. The contract is a standard Lease Agreement with Exclusive Option to Purchase. The price and terms get fixed for 18 months or more. Most agreements are for 18 months, but some are more flexible and be up to 24 months with an option to renew for two 12-month extensions.
Q: How much do I have to put down?
A: This really varies depending on the owner and the home. Typically an owner wants 3.5-7% of the option price as a down payment. The good news is that very often the more you put down as a down payment, the more flexible the owner is willing to be on the terms. You need this money to exercise your purchase option regardless, so the owner just wants to see the money up front of a show of commitment. Also, the more you have as a down payment, the easier it’s going to be for you to qualify for a loan with it comes time to exercise you purchase option.
In order to keep from getting beat out by other potential applicants, a good rule of thumb is to save at least $5000 + a full month’s rent. Remember that all things being equal and there’s one other applicant standing between you and your new home, the owner is going to favor the one who’s prepared with their down payment.
Q: Can I use my 401K for a down payment?
A: Absolutely! Taking funds from a 401K for a option down payment happens quite often. In fact, some retirement funds will let you take a payout without penalty because you can show this money is going towards a home. Also, a job transition can be a good time for this as you can take a partial payout rather than rolling funds to your new company. Whatever you decide, we highly recommend discussing this with an administrator of your plan in order to learn the eligibility and requirements of your options.
Q: But what if I’m turned down?
A: There are a couple things to clarify here. First, people usually aren’t turned down for our program unless they’re not honest during the application process. Second, sometimes people get turned down for a particular home because the owner had multiple applicants he had to choose from (you don’t all want to live together under one roof, right?). At that point you have two options: 1. You can elect to get your funds in escrow back immediately. 2. You can keep the funds in escrow and you’re instantly ready to put in your bid for another home. All you have to do is let us know and we will present your application to the next owner right away!
Q: Once I turn in my application, how long before I find out if I’m approved?
A: Applications can be processed and ready to present to the owner in as little as 48 hours. The final decision rests with the owner of the home, so then we wait to hear back from them (which usually doesn’t take long).
Things that speed up the process:
- Get you application in right away! Applications are processed on a first come-first serve basis.
- Make sure you application is complete (fill in all fields, submit last 2 pay stubs, and submit you VOR authorization form) before processing begins.
- Get your funds in escrow. Applicants who have their funds in escrow not only get a bump in application processing priority over those that don’t, but having all funds in escrow will be required to close the deal even after the contracts are signed.
Note: Applications will be declined if any information on them is found to be false. The applicant will be charged a $25 fee and any other processing fees allowed by law.
Q: If I get turned down or changed my mind before signing the contracts, how long before the escrow funds are released back to me if I’ve put a deposit down?
A: Because we require your down payment to be made in cash or certified check, your down payment can be returned immediately upon your written request. Very often your escrow refund will be mailed that same day provided that all paperwork is in order.
Q: Do I receive a rent credit?
A: There’s a good chance the property owner will be willing to offer a rent credit depending on your final down payment amount. Here’s how this works:
- Let’s say that for every month you pay rent on time, the owner will reduce the option price by $100. This is often called a “rent credit”, but it’s really a reduction in the option price.
- Next, you exercise your purchase option after 18 months. If you’ve paid rent on time for all of those 18 months, the owner would reduce the purchase price of the home by $1,800.
- If the purchase price of the home was $185,000 now it will $183,200.
- Now 100% of your down payment is put towards the new LOWER purchase price!
- Another possible option is to keep the purchase price the same but the owner pays $1,800 of your closing costs.
Q: How much of my down payment is put towards the purchase price?
A: 100%! Complete and total! This is clearly written into all of the contracts.
Q: Is the first of the month the only day I can move in?
A: Not necessarily. You choose whatever date works best for you. You submit the first FULL month’s rent prior to move in, but the next payment due the following month will be prorated based on the number of days you lived in the home that first month.
Q: How soon should I start looking for a Rent-to-Own home?
A: Rent-to-Own homes go quickly, so we suggest looking when your move day is 30-45 days out and no more than 60. Otherwise we run the risk of showing you a home that you fall in love with just to have it taken off the market by someone who can move in sooner. It is possible to have a property owner hold a property for you. This, however, depends on getting the down payment in escrow, putting up the first month’s rent, getting the contracts signed, and how long you want the owner to hold the property for you.
Q: Am I responsible for repairs while I’m renting?
A: For the first 30 days, the property owner is 100% responsible for the livability of the home. After 30 days, the home warranty in place usually covers everything else. Simply pay the deductible (usually $75-$100 per claim). With completely renovated properties, the owner may opt not to have a home warranty because everything is new and covered by the manufacturer’s warranty.
Q: Can I have the house inspected before I decide?
A: Definitely! You’re more than welcome to have your own inspection for your satisfaction. Let us know when you would like to perform the inspection and we will make sure that the home is accessible.
Q: Can I run my business out of the house?
A: The short answer is typically yes. However, this is really a case by case basis. Businesses that get turned down are typically day care business because of high liability assumed by the property owner. Also, it’s important to be aware of the community statutes present for running a business out of your home.
Q: I’m ready to exercise my purchase option. How much will my closing costs be?
A: Unfortunately, we’re not a lending institution so a loan officer is going to be better suited to give you an estimate on what your closing costs could be. We can say, however, that you’re going to want to make sure you’re saving money for your closing costs so you’re fully ready to exercise your purchase option. Here’s a good rule of thumb to follow:
- 2% for taxes, escrow account setup, and insurance.
- 1% of the contract price for title work fees and attorney fees.
- Whatever you loan company adds on top to secure the load. This can be anywhere from 0-4%.
In short, be prepared to pay at least 4% of the contract price and any additional costs associated with getting the loan. Loan fees are totally dependent on your lender. It’s sometimes possible, however, to get these fees down through negotiation. Don’t forget to ask if the owner’s closing company will offer a discount.
Feel free to email us if you have any additional questions. Our heart’s desire is to get you into the perfect home!