What is the qualification of in the rent to own program.?

Asked by Louise Castillo, New York, NY Mon Jun 4, 2012

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Shannon Fren…, , Baltimore, MD
Mon Jun 4, 2012
Hi Louise,

Rent-to-own programs can vary quite a bit. We specialize in rent-to-own in Maryland and I would encourage you to find a professional that specializes in rent-to-own in NY. They'll be plenty of folks who are quick to say no good deal can be done or will even go so far as to call them scams, but my bet would be that if you asked them further their actual experience level in this particular niche transaction, the answer would be little to none (but they've heard stories I'm sure).

A simple way to screen anyone's experience level is to ask them the difference between a Lease Option, a Lease Purchase and Seller financing. If they use these terms interchangeably, their understanding of rent-to-own is minimal and they would not be who you'd want to coordinate the paperwork.

In general, a rent-to-own will require an up-front down payment which is usually signficantly higher than what a security deposit would be. In a lease option (which is what we do), this is also called a non-refundable option fee. It counts 100% towards the purchase price of the home, but if you don't purchase the home, you don't get these funds back. So I certainly don't recommend anyone doing a rent-to-own unless they know that is the house they want to buy.

Monthly rates and "rent credits" seem to vary by region, but I would say on average, they are between 5-15% of the monthly rate for ontime payments. Again this can vary widely and have multiple ways it can be written in the contracts. I'd be weary of and do extra research into any listing advertising 50% of 100% rent credits...it's possible, but very rare.

Another critical factor is to ensure you have adequate time to secure your funding for your purchase. Most folks can repair/build credit within a year's time if they are committed and so an 18 month term is plenty of time (this is our minimum term). We have had multiple sellers with flexibility to do terms in the 3 even 5 year ranges.

So certainly do your due diligence. We just had a successful closing last week on a rent-to-own transaction that took less than 18 months. It was one of HUNDREDS that we've seen successfully completed. But yes, I do hear of folks having a bad experience and 100% of the time when I know the details, it all could have been prevented and most times boils down to someone not knowing what they are doing.
2 votes
Shannon Fren…, Other Pro, HANOVER, MD
Mon Jun 4, 2012
Hi Louise,

Rent-To-Own is just like any other service that exist - there are excellent companies that specialize in RTO, and those that do not understand the process and don't have a good program. When done properly, it is a great alternative to renting!

Too many people don't understand how it works, and confuse it with many other "creative real estate strategies". We have done over 400 RTO transactions, and it was a win-win for everyone - the tenant-buyer and the seller.

To answer your question, the first thing you should do is speak with either a mortgage broker or lender who can tell you how your overall credit looks. That would include your debt-to-income ratios and your credit scores. The bottomline with RTO is that you should not consider it, unless you know the home you do the lease-option transaction on is one that you definitely want to purchase, and that you will be able to get a loan to purchase it during the lease term. That is why you need to fully understand your credit situation.

If you just need a few months before you can purchase, then it's prudent to continue renting until you can get a loan. On the other hand, if you need between 12 and 24 months to potentially qualify for a loan, then RTO can be an excellent way to go. Lastly, if you need more than 24 months to fix/repair your credit, then continuing to rent maybe your best option.

Assuming you are lendable in 12-24 months, and you pursue a RTO transaction, then you want to make sure you are dealing with a NON-DISTRESSED seller who is not behind in their mortgage payments and is not underwater on their mortgage. Also, you want to know the current market value of the home you are considering, and compare that price to your option to buy price. The option price should not be more than current market value comps support.

Then, if all of that looks appropriate, then you would need a non-refundable down payment, plus first full months' rent. A typical down payment is usually between 3% and 5% of the purchase price of the home. The contracts should stipulate that 100% of your down payment will count towards the purchase price of the home.

The great thing is that if all the other information that I have described looks good, then you have the lease term (12-24 months) to work on getting your credit repaired, to get your scores to where they need to be.

Please read over our frequently asked questions on our website at http://www.BuyBaltimoreProperties.com/faq to get a better understanding of how the process should work. Always discuss your plans with a mortgage broker/lender and have an attorney review any paperwork before you sign it. Remember, the monies you put down upfront are not refundable, so you need to have a clear understanding of the market value of the house, the seller's situation, and your own credit.

Good luck with your home search!
1 vote
Tim Moore, Agent, Kitty Hawk, NC
Mon Jun 4, 2012
Bottom line is that you will have to be able to get a loan in a year to be able to buy the house. No loan means you lose the extra money and deposit you put up. They are not good deal, but so many want to believe they are and they just are not. Run away - just rent until you can really buy and then buy.
1 vote
Kajal, Home Seller, Queens, NY
Thu Feb 21, 2013
I do a RENT TO OWN program for first time home buyers who have difficulties qualifying for a mortgage.. we help you FREE of cost with getting your credit up to par and getting you approved for the mortgage so you can own the home!! IF needed i can put you on rental basis where i would be your landlord til you're approved! No closing cost or fees and 100% of the rent goes towards the house. Its a fast process, especially for people who REALLY want to own a home. We have newly renovated properties ALL OVER Queens and Brooklyn. No closing cost or fees and 100% of the rent goes towards the house.

If you're interested give me a call at (917) 407-6520 my name is Kajal and i'd be delighted to be of assistance.

After seeing the previous comments, i decided to give you an analysis of what WE do. also answers to many agent's questions/concerns.

Basically we have solutions to all these problems. I represent a company that does RENT-TO-OWN and our clients who are now HOMEOWNERS are still very content with no complains. WHY? Because with us its a case of you get what you see. I will now answer the questions and concerns from the agent below in the same order:

How long is the Option period?
How much money are you putting in to the Option?
What happens if you are not able to execute the Option?
How do you know what your financial situation will be 2-5 years from now?
How much is the rent in the meantime?
Who will be responsible for maintenance and repair in the meantime?
What will be the Market Value of the home in 2-5 years?
What will be the Selling price 2-5 years from now?

1. The option period depends on your qualifications and situation at the time of buying/choosing

2. 100% of the the rent you pay will go towards the house and NOT our company.

3. All of our transactions are FULLY EXECUTED

4. We only sell our houses when we know our potential buyer can afford it.

5. Depends on your qualifications/the house/your budget.

6. We take care of that.

7. With our company it's irrelevant. Our prices are determined by FHA (Federal Housing Administration) Appraisers. So no matter the value, it stays right there.

8. The selling price wont matter if its already fixed =)

Hope that summed it up for you, if you have further questions, feel free to contact me at (917) 407-6520 and my name is KAJAL.
0 votes
, ,
Mon Jun 4, 2012
Hi Louise,

Rent To Own is a better deal for the Seller than it would ever be for a potential Buyer.

The basic concept is finding a way to "force" savings towards a down payment by including a portion of the monthly rental that goes towards that savings. You pay your rent every month and your Landlord deducts a pre-determined amount to hold in a special bank account, called an "escrow" account. Your Landlord holds that money until you have saved up enough---through this "forced-savings" method---to meet a down payment to purchase the home.

The terms of the purchase price, including the down payment amount, and the amount to be set aside from the rental for down payment, are all set down at the time of lease signing.

It's all about helping the renter/tenant save up enough money for a down payment to buy a home (in this case, the one you're renting). But this is a better deal for the Seller because he gets to lock in a purchase price and a buyer today for a future sale.

Saving money for a down payment? Well, heck, you can do that on your own.

If you are dedicated to the idea of buying your own home, you can create your own savings plan to save up enough money for a down payment. And when you have saved up enough for a down payment, if that takes a year or two or more, YOU get to decide on the price you're willing to pay for the house at that time based on current market conditions. You won't be locked in to a price that may be a lot higher than what the house is worth in the future.

With Rent To Own you'll be locked in both to the house and to the price, even if it takes you 3 years to save enough through the forced savings of the rent payments. What happens if three years from now your life situation has changed? Maybe you need a bigger/smaller home. Maybe your employment has relocated. Maybe your credit or income is insufficient to qualify for a mortgage loan.

Find a way to save up on your own; not with Rent To Own.

Sit down with a local Mortgage Banker and get yourself prequalified, too. You may find you're better qualified than you think you are, and, if you're not, at least you'll know how much loan your income and credit qualify you for, and how much you have to save towards down payment and closing costs.

Trevor Curran
NMLS #40140.
0 votes
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