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Most Recent Posts How Does Owner Financing Differ From Rent To Own?Posted Jul-09-06 20:43:14 PDT Many people are confused about the difference between the terms rent to own and owner financing. The terms are not created equal.
Many people believe that if you rent to own for a while you own the home shortly after that. This could not be further from the truth.
Rent to own would better be described as leasing a property with the option to buy it at a later date. This means you are still renting during the lease period but you can exercise your right to buy it at anytime before your lease expires. The seller is obligated to sell the property to you if you choose to exercise your right to buy before the lease expires. The seller cannot sell the property to anyone else during your lease period. You also get to lock in the price of the house and can benefit from any appreciation in the property during your lease term. You also get an opportunity to fix in credit challenges that you may have while the other benefits described above.
Rent to own options are mainly for those people who can not qualify for traditional financing. It's an alternative to just renting where you don't have the option to buy the property and you are not able to benefit from the appreciation. You are generally living in a home that you really want to buy but you cannot qualify for a traditional loan at this time. Many times the owner of the property will also give you a portion of paid rents back in the form of a rent credit. This can assist you in helping you save for your down payment in the event you need one once you begin to get qualified for your traditional loan.
So let's recap. The rent to own works like this:
a. Sign a one or two year lease b. Secure the option to buy. This means the seller can not sell to anyone else. You're doing this because you want the home right? Because you are tying up the sellers' property with a one way agreement, you would need to compensate them for taking it off the market and making it available to you exclusively. This compensation is called option consideration. The seller is giving up something of value (his/her right to get the equity right now through a direct sale), in return for your down payment (option consideration). The option consideration typically ranges from 3% to 5%. At any time during your lease you have the choice to exercise your option to buy the property. If however you choose to let your option expire, you can't get your consideration (down payment) money back, since that was compensation to the seller for letting you have time to buy the property. An owner finance is a totally different beast. With an owner finance the seller of the property is acting as your bank. Just like a bank they set the terms of the loan that they will be giving you. This means that they determine the length of time you will have to repay the loan. The seller determines the interest rate, whether or not there will be a balloon payment and if there is to be a pre-payment penalty associated with the loan.
Typically in an owner financed loan the seller is wanting to get a higher down payment, usually 10% down because there is more at risk. Unlike a rent to own, a seller can not take you to eviction court for nonpayment. The seller would actually have to foreclose on your loan just like a traditional bank would do because you would be in default of the terms of agreement.
With an owner financed loan you are no longer renting and you get to deduct the mortgage interest and real estate taxes on your tax return. Each month a portion of your payment is going to reduce the amount of money you borrowered to buy the house. You are the owner of the property and full rights to do whatever you want with the property. You can sell it outright if what you sell it for pays off any underlying liens on the property. You can even lease the property as long as your payments to the original owner remain current.
You have alot more flexibility with an owner finance compared to a rent to own. In both situations the seller of the property have much more lenient credit requirements than a traditional bank. Typically you can still but a home through either method even if you have the following:
Foreclosure
Bankruptcy
Repossession
Collections
Charge-offs
Student Loans
Tax Liens
Judgments
Child Support
Undocumented Income
No Social Security number
Self-Employed
The situation would differ depending on who was selling the property but with a large enough down payment any of the above situations can be overcome.
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