Rent to own mortgage financing is indeed possible and worthy of an article. First and foremost, the two common approaches are an ‘option to purchase’ or ‘lease-purchase’. In other words, you are not obligated to purchase once the lease expires, however you are obligated in the latter approach.
Let’s begin with confirming your suspicion that a rent to own, is just that, you rent until you own. In most cases, you will apply a deposit and make monthly installments to the owner of the property. Generally, a portion of your monthly payment will go to the owner, and the other portion counts towards a down payment.
There are typically a few reasons as to why you would consider a rent to own mortgage situation.
- Insufficient down payment: Say that the size of your down payment and maximum mortgage amount is insufficient to purchase a property. Entering into a rent to own might enable you to accumulate savings in order to increase the size of your down payment. Therefore, you would work out a timeframe with the owner that will allow you to build up the down payment and purchase the property using the mortgage that you were initially approved for.
- Less than perfect credit: Credit issues may impact you from qualifying for a traditional mortgage. No credit, bruised credit, or previous insolvency will require a waiting period. For instance, if you have had a previous bankruptcy or consumer proposal you’ll need to hang tight for a minimum of 2 years. You must be able to show your mortgage lender that you have used 2 new credit accounts responsibly for a minimum of 2 years. Although we also work with alternative bank lenders who will provide good rates, you may only qualify for private financing. Therefore, the rates may not be attractive enough for you to purchase until you are deemed to be more creditworthy. The same applies if you have recently moved to Canada and must establish credit.
- Equity Anticipation: In some cases, you might actually be able to reap the rewards of value inflation. Say you enter into a rent to own for $450,000 with a purchase option in 3 years. Should the property value increase in 3 years, you may end up paying under market value for your home. In other words, you could be spending $450,000 to purchase a home worth $475,000.
- Trial Run: This example applies if your rent to own contract does not stipulate that you must purchase the property. You’d be paying to rent someplace else if you weren’t trialing the rent to own, let’s keep that in mind. So, in the event you end up disliking the house, your finances change, the neighbourhood loses its charm, or any other reason, you’re free to walk.
There are a few potential pitfalls that you’ll want to keep in mind. Firstly, if you are equity speculating, keep in mind that it’s possible that the value might declined. Secondly, if finances become tight, your plan to accumulate savings may not come to fruition. Should your credit not improve to traditional lender standards, you risk not being able to obtain low rate financing. Worst of all, if you cannot come up with the purchase financing, you will lose your deposits and rental credit.
Most importantly, if you are under contract to purchase and bank financing isn’t possible, call us. In the event you only qualify for private mortgage rates, we could look into a fully open mortgage for you. Paying 1, 2, or 3 months of interest might be cost-friendlier than losing all of your deposits and credit. In fact, if the value of your property increases at the time of purchase, you might end up ahead of the game.
Feel free to contact us at any time about a rent to own mortgage.
DV Capital Corporation
FSRA 13186
T: 416-839-5874
TF: 1-866-839-5874
E: [email protected]