Can a rent-to-own without a down payment work?

Curious about rent-to-own, but have no money to pay? Wondering if a no-down-payment rent-to-own option might work for you?

It is a very important and good question for you to do a little research on the subject. You will need to understand the challenges that will arise as a result of an initial rental with no money to buy. Hopefully this article will raise awareness of some of the questions to ask yourself to protect yourself if you are looking for a starting rental with no money to buy.

Simply put, an initial rental with no money to buy is one where you don’t have to put any money down to get into the program.

What are the implications?

1. More risk for the investor, so he will compensate his risks by charging him higher monthly rents (perhaps even higher than market rents). I’ve seen situations where rents for a no-down-to-purchase rental were as high as $ 2000-2500 when market rents in the same area were $ 1500 per month. This $ 2000-2500 amount doesn’t always take into account the money that is credited for the down payment, so be sure to ASK!

2. You will have to save more of your down payment before the rent-to-own program ends or you will risk not qualifying for a mortgage and lose your property as a result. Looking at this in terms of numbers, a median home price of $ 300,000 will require a 5% down payment (or $ 15,000). If you go into rent-to-own with initial ZERO, you’ll need to save up to $ 15,000 over an average 3-year term (for example) to qualify for that mortgage at the end of the term. That means saving $ 5,000 a year. If your rent to own property allocates, say, $ 200 a month for your down payment, you would accumulate $ 7,200 over the three years. That means you would need to recover the balance, or $ 7,800 yourself. If you cannot do this, you will not qualify for your mortgage and will most likely be asked to vacate the home at the end of the rent-to-own term.

3. You will not accumulate any value in the property (basically, you are a tenant (paying higher than market rents) in the hope that you can save enough down payment and purchase the property at the end of the rent-to-own program Equity is the amount of money you have invested in the property or earned on the gain in value of the property. For example, if you deposit $ 10,000 in a property, you automatically have $ 10,000 in equity in that property. Initial money, you have zero equity in property.

4. In many cases (not all, but many), you will be left alone to improve your credit standing and save a minimum of 5% on your down payment. If you have not received any credit repair support and your credit has not been repaired enough to qualify for a 5% down payment, the lender or bank may require a 10% down payment, 15 % or 20% (which you probably don’t have since your goal was to save 5% on your down payment). Looking back at the median house price from the second point ($ 300,000), if you couldn’t improve your credit during the term of the rent-to-own program and you needed 10% to get the mortgage, you wouldn’t have to come. with a down payment of $ 30,000, not the $ 15,000 in the previous example. If $ 15,000 sounds like a daunting task, imagine $ 30,000 or even more if 15% or 20% is needed.

So what does all of this mean to you?

Do your DUE DILIGENCE!

Ask questions and be VERY sure you know all the pitfalls you may encounter if you choose to go into a no-down payment rental. To get started, ask questions like:

1. How much is the monthly payment? (compare it to other rentals in the area)

2. How much of each monthly payment goes towards your down payment?

3. Do you offer credit support?

4. What happens at the end of the rent-to-own term if you can’t get a mortgage?

I’m not saying that a no-down rent-to-own can’t be successful. I’m just saying that the road to success is MUCH harder this way and requires a very different level of determination and discipline.