Mortgage Lenders Saying No? Rent-To-Own May Be An Option

In 2012, according to the Federal Financial Institutions Examination Council, as many as one-third of all mortgage applicants were denied by mortgage lenders. So, if you've been trying to get approved for a mortgage without success, you are definitely not alone. With the state of the economy, it seems you need excellent credit to be approved these days. Unfortunately, the same state of economy, in addition to the credit crisis and unemployment rate, has made the American Dream of home ownership difficult for many people. But, it is possible to buy a home without a mortgage lender. It's called rent-to-own, but you still may need a mortgage at some point in the future. Here's how it works.

Financing Options to Rent-To-Own

There are basically two financing options for rent-to-own properties: seller financing and mortgage lender. Since you haven't been successful at getting approved for a mortgage, you may think your only option is to find someone who will offer you seller financing. Seller financing is when the seller will except payments from you over the entire term of the contract, even if it's for 20-30 years. However, many rent-to-own sellers would rather you work on building your credit rating during the first several years of the lease so you can get a mortgage later. In fact, most rent-to-own lease agreements have this stipulation written into the contract. And, if you are unable to get approved for a mortgage at the predetermined time in the future, you may lose all of the payments you had made up to that point for the real estate property.

Payments & the Lease Agreement

A lease agreement for a rent-to-own property is nothing like a typical lease agreement. Actually, neither is the amount of money you will pay. You can expect to pay more up front for a rent-to-own home than you would for a typical rental unit. The reason for this is because you will be paying a downpaymentand a security deposit for the home, instead of a just a security deposit. The security deposit is usually non-refundable, but the downpayment is usually not. However, a portion of the downpayment you give to the seller may be used for when you do qualify for a mortgage later, depending on the terms of the contract. Sellers ask for a downpayment because they want serious tenants, not someone who only wants to live in the home for a year or two. Remember, you will typically be required to get a mortgage after a period of time, so you'll have to work hard on building your credit so you don't lose your downpayment. 

Maintenance & Upkeep of the Property

Just as you would if you bought real estate property the traditional way with a mortgage, you will need to maintain the house and the property yourself. Even though you may call the seller your landlord, he or she will not have any obligation to make repairs on the property or keep it maintained. However, there may be some stipulations within the contract or lease agreement that you will slowly take over the maintenance and repairs. This is something that can and should be negotiated with a real estate lawyer. That way, you won't sign a contract that may not be legally binding in the court of law.

If your dream is to own a home yet your credit is less than stellar, you may want to look further into rent-to-own properties. You may be able to find some listed in your local advertisements alongside other homes for sale and properties for rent. The best way to find rent-to-own properties may be by consulting with a real estate attorney who specializes in these types of lease agreements and contracts.