Rent to Own Mortgage.
Rent to own mortgage financing is indeed possible and worthy of discussion. 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 by confirming that you are correct to assume that a rent to own is renting until you own. In most cases, you will need to provide a deposit and make monthly instalments to the owner of the property. Generally but not always, a portion of your monthly payment will be credited towards your down payment. This can make or break a successful ending and is very important to figure out from the onset.
The Pros of a Rent to Own Mortgage.
- 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 usually 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 trialling 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.
- Equity Speculation: Contrary to our example about equity anticipation, there’s an equal risk for a negative outcome. There is no crystal ball that will grant us predictions of the real estate market in a few year’s time. Consider how little notice the negative effects of COVID-19 brought to us. There is a chance that the property you are under contract to purchase for $500,000, might be deemed to hold a fair market value of $450,000 at closing. This could become a very big issue if you are under contract to purchase the property after the rental term. Do not expect your landlord, the vendor, to show mercy when push comes to shove, they are running a business, at the end of the day. In most cases, your mortgage lender will base their loan on the lower of the value and purchase price. In this case, you would be responsible to provide the cash difference at closing – if you have this money.
- Mortgage Difficulty: Two weeks prior to closing you are informed by your mortgage lender that they cannot proceed with their approval. A final credit check revealed 2 loans and a car loan that you recently acquired, throwing off the debt service ratios. You might be left scrambling to find a mortgage in time to close. If you cannot close on time, your landlord might be able to charge extension fees, or worse, forfeit your contract.
- Financial Difficulty: If your finances become tight during the rent to own period, or your savings become depleted, you might be unable to close on the purchase.
- Credit Issues: Further to our previous point, there is a chance that your credit does not establish itself to institutional guidelines. Therefore leaving you subjected to non-bank financing.
If you are currently under contract to purchase and bank financing isn’t possible, speak to us. We might be able to provide you with a non-bank mortgage for as little as one, two, or three months. It might be worth the cost of a few months of interest to bridge your way to foreseeable bank financing. Furthermore, completing the purchase will allow you to sell on your own terms without losing your deposit and rental credits. In addition, you might be able to profit from the upside if the property value has increased, as well as avoiding potential litigation.
Feel free to contact us at any time to learn more about a rent to own mortgage.
DV Capital Corporation
FSRA Brokerage License:. 13186