You may have heard the terms “rent to own”, “lease option”, “lease purchase” or “lease to own” when it comes to buying a home. The legal instruments used to arrange that type of transaction have changed over the years, but ultimately the purpose is the same; home buyers arrange the home purchase with the seller, outside of traditional financing in order to secure a home when they might not otherwise be able to obtain financing at the current time.
In traditional rent to own scenarios, a property owner and a tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. The terms of the arrangement, with regard to the amount of deposit, whether or not a portion of the payments go towards the down payment or reduce the sales price or how much the property will be purchased for at the time of exercising the option, are all up for negotiation.
In today’s market, there are not many sellers whose current mortgage terms allow them to do this and there are fewer sellers who own their property outright and are able to make a rent to own arrangement. Therefore this is not very common.
There are schemes out there involving so-called wraparound mortgages, a type of creative seller financing that is legal in Texas. But critics say they are too risky and invite fraud and theft. Lawyers representing local victims say many of their clients have had their credit ruined and their savings wiped out. Many buyers and sellers have fallen victim to this scam, where a third party (A) convinces the seller (B) to sell their property to a buyer (C) brought by the third party (A). Basically A creates a wrap around mortgage on B’s property and takes over making the payments on B’s existing mortgage. C makes payments to A, but A doesn’t pay B’s mortgage as promised. Eventually the property will be foreclosed, B’s credit gets ruined and C gets evicted and loses all the money they paid.
You may be able to find owner financing on a home that a seller owns outright and the seller feels like they can take the risk of acting as the lender. A lot of times, these are done within the family. An attorney should draw up these documents if you find a seller willing to do this to ensure you are protected legally and financially. It’s all perfectly legal, but opportunities like this would be few and far between as most people just want to sell and take their equity and move on. If you come across an offer like this, especially on Craigslist, Facebook or a hand written road sign, beware. There are a lot of scams out there. Contact me and I can help you determine if it’s legitimate.
The good news is that there are now a legal, trustworthy and completely transparent ways to get into a home, as a tenant, and eventually buy that home at an agreed upon price.
There are two companies that are RE/MAX approved suppliers that can help people get into a home with a lease purchase.
MOTTO LTO (Lease to Own)
This unique program is a public-private partnership utilizing an FHA loan program to do a lease purchase on the home of your choice. Rent for up to three years and then assume the loan when you can qualify on your own. This program gives you the time you need to build your credit history and save some more money while building home equity you can use toward your purchase. Lock in your future home price and rate at today’s cost plus a conversion fee. Compare that to just renting, where you pay thousands of dollars year after year without seeing a payback – building someone else’s future, not your own. Get more info here.
HOME PARTNERS OF AMERICA
Another option is through Home Partners of America, tenants are provided a transparent path to homeownership through its Lease with a Right to Purchase Program. If you are still working to rebuild your credit, save for a down payment, or need to have two years self employed tax returns under your belt before you buy, this is a great program for that transition period. It’s also great for people moving to the area who are waiting for their house to sell elsewhere. If you would like more information about how Home Partners of America works, CLICK HERE.
Personally I prefer the MOTTO LTO program because you are building equity and you secure your loan when you start the lease. The upfront costs with the MOTTO program are higher because you are investing into something that will eventually be yours.
Sometimes, with the right knowledge and direction from experienced real estate professionals, you might be in a stronger buying position than you think. You don’t need 20% down to buy a home. There are other loan programs out there that are geared to first time buyers with good credit and income who may just be short on cash for the downpayment and closing costs. Down Payment Assistance DPA-FHA programs and USDA loans are two good ways to get into a home with little to even no money down.
There are pros and cons of course and everyone’s situation is different. If you would like to meet and discuss these programs and see if they are right for you, please call me at 512-966-6540 or email me at clegrand@cedarparktxliving.com
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