Can a No-Money Down Rent to Own Work?
Are you disinctive about rent to own, but don’t have any money to put down? Wondering if a no-money down rent to own option can work for you?
It is a very important question and good for you for doing some research on the topic. You will need to understand the challenges that will come as a consequence of a no-money down rent to own. Hopefully this article will increase awareness around some of the questions you need to ask to protect yourself if you are pursuing a no-money down rent to own.
Simply put, a no-money down rent to own is one where you do not have to put any money down in order to get into the program.
What are the implications?
1. More risk to the investor so they will offset their risks by charging you higher monthly rents (maybe already higher than market rents). I have seen situations where rents for a no money down rent to own were as high as $2000-2500 when the market rents in the same area were $1500 per month. This amount of $2000-2500 does not always explain any money being credited towards your down payment so be sure to ASK!
2. You will have to save up a greater portion of your down payment by yourself before the end of the rent to own program or risk not qualifying for a mortgage and consequently losing the character. Looking at this in terms of numbers, an average house price of $300,000 will require a 5% down (or $15,000). If you come into the rent to own with ZERO down, you will need to save up $15,000 over an average term of 3 years (for example) to qualify for that mortgage at the end of the term. That method saving $5,000 a year. If your rent to own allots, say, $200 a month towards your down payment, you would build up $7,200 over the three years. That method you would need to make up the balance, or $7,800 yourself. If you are unable to do this, you will not qualify for your mortgage and you will more than likely be asked to leave the house at the end of the rent to own term.
3. You will not build up any equity in the character (basically you are a renter (paying higher than market rents) with the hope that you can save up enough down payment and buy the character at the end of the rent to own program. Equity is the amount of money you have invested in the character or earned on the value gain for the character. For example, if you put $10,000 down on a character, you automatically have $10,000 in equity in that character. If you put no money down, you have zero equity in the character.
4. In many situations (not all but many), you will be left to your own devices to enhance your credit situation and save up a minimum 5% down payment. If you have received no sustain on your credit repair and your credit has not been repaired enough to qualify for 5% down, you may be required by the lender or bank to give 10%, 15% or 20% down (which you will likely not have since you were targeting saving 5% down payment). Looking back at the average price of house from the 2nd point ($300,000), if you were unable to enhance your credit over the term of the rent to own program and needed 10% to get the mortgage, you would not be required to come up with $30,000 down, not the $15,000 from the past example. If $15,000 sounds like a daunting task, imagine $30,000 or already more if 15% or 20% is needed.
So what does all this average to you?
Do your DUE DILIGENCE!
Ask questions and be VERY sure you know all of the pitfalls that you can run into if you choose to go into into a no money down rent to own. As a start, ask questions like:
1. How much is the monthly payment going to be? (compare it against other rentals in the area)
2. How much of each monthly payment is going towards your down payment?
3. Do they provide credit sustain?
4. What happens at the end of the rent to own term if you cannot get a mortgage?
I am not saying a rent to own with no money down cannot succeed. I am just saying that the road to success is MUCH harder this way and requires a very different level of determination and discipline.