Expert: Lisa Webber - 6/28/2009

Question
Hello,

I live in Maryland and really would like to find an honest rent-to-own situation.  My credit is not good, but my rental history is good and I have a mortgage on a home (that I do not live in) that has been paid on time for years.  I have been self employed for a while, but I am now with a company and it appears that I will be working consistently.

Is rent to own something that I can really do?  Are there any legitimate programs that can help me to secure home ownership again?  Do I have to find the home seller myself?

When I get the home, I am planning on living in it and having a renter or two, to ensure a reliable income.

Do you know anyone that can help me?  I have decided that this is going to be my unrelenting focus until I get a home of my own.

I found the National Home Buyer's Alliance and their program sounded incredible, then I found two articles in the Rip Off Report, and although from the descriptions, it sounds like the people may not have understood the process.  Do you know anything about them?

Answer
Your first step would be to discuss your situation with a mortgage broker and see how long it will take to be able to qualify you to get another mortgage.  Being self employed is a problem in this market as it is very difficult to get a stated income loan, especially if your credit is not good. In a rent to own situation, in most cases you are going to eventually need to obtain a mortgage.  Some sellers (investors) will let you pay them until the house is paid off and they'll hold the house in their name.  If you stop paying, the house reverts to them and any money that has been paid towards the house goes back to them.  

If you are now employed with a company and get a regular paycheck, you'll be in a better position to obtain a mortgage.  A popular mortgage in this market for people that don't have a lot of cash is an FHA mortgage.  If you financed your other home in a different way (conventional) then you could get an FHA loan on your new home.  With FHA you'll need 3.5% as a downpayment and many times you can get the sellers to pay your closing costs which are about another 6%.  You'll want to check with a lender to see how much of a loan you'll qualify for at your current income or project income in 2 years or so to get an idea of what you'll be able to afford.  I often have people come to me telling me they want to do a rent to own on a $300,000 home and they make $20,000 a year.  The problem there is they will not any time in the near future qualify for that $300,000 home so a rent to own situation for a home like that really isn't an option unless they are able to increase their income or set their sights on a lower priced home.  For an FHA loan, your credit needs to be a minimum of about 620 FICO score.  If you have any collections on your credit, your first step is to pay them off because those will be a hindrance to getting a loan.  Make sure to keep paying off your other debts (credit cards, car loans, etc.) on time each month so you don't take any other hits to your credit and don't let a bunch of people pull it.  Your lender can pull it once for you and many will help you improve your credit free of charge.  

There is no real secret to a rent to own situation.  They are negotiable many times with sellers who want to sell but for some reason are having a hard time selling (house isn't in top condition, they aren't willing to drop the price to market to sell, etc.).  You don't need a special program to do it, many times a local Realtor can help you.  In most cases the sellers will want to do a contract with a rental agreement stating when the settlement is going to be, for example, a settlement date 2 years out with a certain amount of the rent during that time going towards the downpayment that you'll need.  During that 2 years you can work on your credit and if you structure the rental agreement right, you can have all of your downpayment amount saved up by that point too.  

What you and the seller will be banking on is that the house will appraise for whatever you agree on price-wise too which might be tricky in this market.  You'll agree on price and terms up front but if prices drop and the house doesn't appraise when you are wanting to settle, you may both need to negotiate again at that time.  My experience has been that buyers tend to pay more in rent to own situations than they would if it were a straight purchase and they were able to negotiate with a seller on a direct purchase.

There are some people whose life choices and lifestyles make them poor candidates for home ownership because they are not willing or not able to do the things that make home ownership possible.  Some organizations will take advantage of people in these situations dangling the carrot of home ownership in front of them when in reality they will not be able to actually ever accomplish it.  If a person consistently does not pay their bills on time, lets accounts go into collection, switches jobs frequently, pays rent late, lives beyond their means, etc., they will most likely never be able to take on the responsibility of home ownership.  From what I've read about NHBA, they are offering their "services" to people who can barely pay their rent and they are leading them to believe that through this magic program they'll be able to be home owners.  There is no magic program.  It's a matter of getting and keeping a job that pays enough to cover your bills and projected mortgage payment, paying your bills to get your credit score high enough to qualify for a mortgage and having money left over to do required home maintenance as the years go on.

It sounds like with having your new job, if you are able to get your credit score up and save some money, maybe banking income tax refunds, you should be able to make your plan a reality.  You may or may not want to try to do a rent to own program, you may just want to wait until you're able to do a straight out purchase and get the best deal when you are negotiating.  I hope this gives you some food for thought.  Good luck to you!