We talk to folks every day who have some credit “skeletons.” They didn’t wake up one day and decide not to pay their bills – something awful happened… and NOW that things are better – they want a permanent home for their family.
One option that some landlords offer to folks with low credit scores in North Carolina is “rent to own.”
“In a nutshell, when you sign a lease or rental agreement, you are committing to pay higher rents on the home for a period of years, at which point you have an option to buy the home at the end of the lease.”
Obviously, if you are one of those folks who went through a rough patch, this might sound like an easy way to let time pass - and still be able to provide the stability you so desperately want for your family. For many potential homebuyers, the reason to enter into a rent to own arrangement boils down to having a “forced savings plan.” With a Rent To Own, the excessive portion of the rent is applied toward the down payment of the home.
3 Reasons We Discourage Folks From Rent to Own Agreements
1. This scenario is “offered” to folks that cannot qualify for a home loan right now. Paying rent to someone under the pretense that you will have the option to buy this home in a few years DOES NOT help you to qualify for that home loan down the road. The landlord is not reporting to the credit bureau!
2. Mortgage Loan Underwriters are extremely critical of rent to own “down payment” dollars. The Lender may not accept the down payment source from the seller unless it meets strict verification guidelines.
3. What if the seller loses the home? You have no assurance that this “landlord” is current on their mortgage – or makes the mortgage payment. In the last 12 months, we’ve talked to DOZENS of people in North Carolina who are scrambling to get into another house because the one they were renting was slapped with a foreclosure notice!
Bottom Line: If you are not in a position to buy a home now, do not enter into a higher burden rental situation. Work on your Credit!
- Get a copy of your credit report – you need 2 or 3 open REVOLVING credit. Go to the bank at WalMart – open a couple of Secured Credit Cards.
- Settle your large collection accounts that have been on your credit report for 3 years or less. This includes a repossessed car. If the collection is more than 3 years old, if it’s a medical collection – leave it alone for now.
- Build up your Savings. Do you have $1000 in a savings account? DO THAT. Don’t give an extra $200 to a landlord – give it to YOURSELF. When you buy a house, even if you get a $8000 downpayment credit (or you need no downpayment and use a USDA loan) you will have SOME costs associated with the purchase.
When you are able to qualify for a home loan, THEN, and only THEN start looking for your dream home. For most potential buyers – even those with a previous bankruptcy, you can buy a house within 24 months if you start working on your credit NOW.
A Rent To Own Agreement simply goes against logic. Why pay more for your rent? It’s not getting you any closer to fixing your credit? If you still have poor credit in 3 years – you STILL can’t buy the house!
There are no short cuts.