Many people dream about owning their own home but don’t feel they can afford it, for various reasons. It can be a considerable commitment to scrape together a down payment and all of the legal and closing costs involved in buying a property from a seller.
In addition, people might be deemed a credit risk for various reasons, which means it could be difficult to get an affordable mortgage, homeowner’s insurance, and so on. They might also have unpredictable income due to working for a commission, for example, making them seem a greater risk to the bank they have applied to for a mortgage.
One recent idea for extending home ownership to those who might not otherwise qualify is the "rent to own your home" offer. The principle behind it is that your monthly rental payments won’t just be rent, or "dead money" as some people call it, but a payment towards equity in the house - with a view to paying off the full price of the home and eventually owning it outright.
This can sound like a dream come true, but as with all things, it is a case of buyer beware.
A Typical Rent-to-Own Agreement
In a rent-to-own deal, the person or company that owns the home you are interested in agrees to sell it to you in the future for a specific price. The rent you pay every month is counted toward your future down payment on the house.
However, these deals can be risky, and even complete scams, for a number of reasons. There are several main issues to look out for:
- The "seller" doesn’t really own the property
Some people are renting the home themselves, and would only be subletting to you. Or they have keys and access to the property, but no right of ownership.
- The owner hasn’t paid property taxes
This can mean your payments get eaten up, giving you a lot less equity in the house and making it take much longer to pay it off.
- The owner is not allowed to sell it
There can be a number of reasons for this. They might not be paying taxes and have a lien on the property. It might also be in a designated flood zone and thus have restrictions on it being sold.
- The house is in terrible shape, or has issues like lead or asbestos