Rent vs Buy in Newark>Question Details

Lizclementon…, Home Owner in Newark, DE

How does it work to rent to buy?

Asked by Lizclementoni@aol.com, Newark, DE Fri Jun 8, 2012

I am in the process of renting to own a house. The owner is asking for $1,000 down payment. He said $55.00 of that would go to principal and that's all I would get at end towards down paymet . I thougt it all would go to down payment. I will be paying $1,100/month. His mortgage is $800.00. Of that, he said $55 would go to principal, which I assume would go towards my down payment of the $800 when I go to purchase the house. I am confused. Is this all correct?

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Shannon French’s answer
Hi Liz,
Everyone doing rent-to-own is probably going to have their own way of doing things, and as in every type of service out there, some know what they are doing and others don't.

We do rent-to-own transactions full time, and with ours, 100% of the down payment goes towards the purchase price of the home. Then, depending on our sellers, most will allow 10% to 20% of the monthly rent to count towards a further reduction in the purchase price.

As a general rule, with our down payments, we require a minimum of 3.5% of the purchase price of the home or $5,000, whichever is greater, to be put down upfront, plus full first months' rent. Again, 100% of the down payment counts towards the purchase price of the home.

We have a frequently asked questions page on our website if you would like to read more about how a property rent-to-own (lease with an option to buy) should work. Go to http://www.BuyBaltimoreProperties.com/faq
1 vote Thank Flag Link Fri Jun 8, 2012
This is actually a simple question and dealing in Delaware.
The other responses you have before mine are all wrong.
Delaware, has laws already established for rent to own...
You have to talk to an attorney to get all the very simple facts of the matter...
I would recommend Jim Woods or another full time real estate attorney...
Again, I this is actually a very simple question and answer but since I do not represent you I cannot give you the full answer without crossing the law and practicing law without a license...
So, contact a real estate attorney and pay them approx. $500.00 to represent you in this transaction.
0 votes Thank Flag Link Fri Jun 8, 2012
I'm not a big supporter of rent to own, but if I were instructing a client, I would make sure that the monies collected each month that go towards the down payment are put in an escrow account either with an attorney or in a bank account that both buyer and seller have to sign in order for those funds to be released.
0 votes Thank Flag Link Fri Jun 8, 2012
It works well for the seller, not so much for you. It doesn’t matter what you and the seller agree to regarding rent being applied to the purchase price. When it comes time for you to get a mortgage the underwriter is going to follow the rules for the type of loan you use. All of the different underwriting guidelines are very specific about how to treat this type of transaction. None of them say to follow the contract between the tenant and the landlord. It gets very confusing from your side because, yes, the seller may give you a credit for part of the rent paid but the lender will not acknowledge it as down payment. Only the amount of the rent that is above the fair market rent can be counted as down payment for getting a mortgage.

Okay, here goes, if the rent is $1000 a month and the seller is giving you a credit of $55 per month then at the end of the first year your credit towards the sale price is 12 x 55 = $660. You apply for a mortgage and expect to use that $660 as part of the down payment. If the underwriter says the fair market rent for the house was $1,000 he/she will not allow you to use the $660 towards down payment in order to qualify for a mortgage. You can lower the price of the home by $660 which is what the underwriter will do, but you still need to make the minimum down payment in addition to credit. Pretend the sale price is $100,000, the minimum down payment is $3,500 on an FHA loan. If my example above holds true the sale price is lowered, $100,000 - $660 = $99,340. You would still need 3.5% of $99,340 or $3,476. The amount of down payment you will need only decreases by $24.

His current mortgage payment has nothing to do with what you will owe when it comes time to get your own loan. See below

Jim Simms
NMLS # 6395
JSimms@cmcloans.com
Financing Kentucky One Home at a Time
0 votes Thank Flag Link Fri Jun 8, 2012
I have reread your post 4 times and I still can't understand it. I am not a fan of rent to own because usually they don't work out and the renter seldom is able to get a loan to purchase the home and they lose the money they have put up.

Not sure why the owner is asking for a down payment. Normally the owner asks for a deposit or option fee. Then they usually add an extra amount to the monthly rent each month and add that up to put towards the purchase. The option fee (or deposit) is a fee you pay the owner so he holds the house for you and does not sell it, you don't get it back. In a year, or agreed time frame, you must be able to go to a lender and get a loan to buy the house. This is usually where it all goes bad. The house must appraise for the agreed amount or the bank won't lend or the renter can't get a loan. This then puts the renter in default and they lose the option to buy and they lose all the extra money they gave the seller. Rent to buys always favor the seller and they rarely work out for renters.
0 votes Thank Flag Link Fri Jun 8, 2012
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