Curious about rent-to-own, but don’t have the money to put down? Wondering if a no-money rent-to-own option might work for you?
This is a very important question and a good one for you to do some research on the subject. You will need to understand the challenges that will arise as a result of a rent-to-own with no down payment. Hopefully, this article will raise awareness about some of the questions to ask yourself to protect yourself if you’re looking to rent-to-own with no money down.
Simply put, a no down payment lease is one where you don’t have to make any down payment to get into the program.
What are the implications?
1. More risk for the investor, so he will offset his risks by charging you higher monthly rents (perhaps even higher than market rents). I have seen situations where rents for a rent to own with no down payment were as high as $2000-2500 when market rents in the same area were $1500 per month. This amount of $2000-2500 does not always represent the money credited towards your down payment, so be sure to ASK!
2. You will need to save more of your down payment before the end of the rent-to-own program or risk not qualifying for a mortgage and consequently losing the property. Looking at this in terms of numbers, a median home price of $300,000 will require a 5% down payment (or $15,000). If you go into rent-to-own with ZERO down, you’ll need to save up to $15,000 over an average term of 3 years (for example) to qualify for that mortgage at the end of the term. That means saving $5,000 a year. If your rent-to-own allocates, say, $200 a month for your down payment, you would accumulate $7,200 over the three years. That means you would have to make up the balance, or $7,800 yourself. If you cannot do this, you will not qualify for your mortgage and will most likely be required to vacate the home at the end of the rent-to-own term.
3. You will not build up any equity in the property (you are essentially a renter (pay more than market rents) hoping to be able to save enough for a down payment and purchase the property at the end of the rent-to-own program Equity is the amount of money you have invested in the property or earned on the property’s gain in value. For example, if you put $10,000 down on a property, you automatically have $10,000 equity in that property. If you don’t put money , you have zero equity in the property.
4. In many cases (not all, but many), you will be left to your own devices to improve your credit standing and save a minimum of 5% of your down payment. If you have not received credit repair support and your credit has not been repaired enough to qualify for the 5% down payment, the lender or bank may ask you to put down 10%, 15%, or 20 % Down Payment (which you probably haven’t since you were aiming to save 5% down payment). Looking back at the median home price from the second point ($300,000), if you couldn’t improve your credit during the term of the rent-to-own program and needed 10% to get the mortgage, you wouldn’t be forced to come up with $30,000 down payment, not the $15,000 in the example above. If $15,000 sounds like a daunting task, imagine $30,000 or even more if 15% or 20% is needed.
So what does all this mean to you?
Do your DUE DILIGENCE!
Ask questions and VERY make sure you are aware of all the pitfalls you may encounter if you choose to go into a rent to own with no down payment. To get started, ask questions like:
1. How much will the monthly payment be? (compare to other rentals in the area)
2. How much of each monthly payment goes toward your down payment?
3. Do you provide credit support?
4. What happens at the end of the rent-to-own term if you can’t get a mortgage?
I’m not saying that a rent-to-own with no money down can’t be successful. I’m just saying that the path to success is MUCH harder this way and requires a much different level of determination and discipline.