South Bend Property Investment - Credit Score and Payments

Chapter 8: Getting One’s Credit in Order before investing in a home

Before purchasing any home, homebuyers should get their credit in order. In today’s tough economy, many prospective homebuyers have less than perfect credit. Some have gone through foreclosures, others have had to file bankruptcy and some have had trouble meeting bill payments due to job loss and other difficulties. While bad credit may not hold buyers back when purchasing rent to own homes, homebuyers still need to get their credit in order, no matter the reason for the credit problems. Other homebuyers may not have any credit, which may require some work as well.

Why Credit Repair is Important

Buyers should not underestimate the importance of fixing their credit when preparing to purchase a home. The homebuyer’s credit score can determine the interest rates on mortgage loans and a credit score that is too low may make it nearly impossible to qualify for a mortgage, especially with the rigid lending specifications today. Rent to own homes allow potential homeowners some time to get their credit in order before applying for financing, but credit is still important, even with this window of time to fix bad credit problems. Wasting the time available and failing to improve credit may result in being unable to make the purchase, which will mean all the money spent on the lease option was in vain.

Clearing up Inaccuracies

Buyers that want to improve credit when buying rent to own homes need to carefully deal with any inaccuracies on their credit report. Many individuals investigate and find inaccuracies on their credit report that are affecting their overall credit and credit score. The good news for homebuyers is that clearing up these inaccuracies can help improve their credit. Buyers should start by checking their credit reports from each of the credit reporting agencies, including Experian, Trans Union and Equifax. After receiving the credit report, checking each entry for accuracy is essential.

If buyers find any inaccuracies, they can dispute them with the credit reporting agency. Individuals should compose a letter of dispute along with any information that proves the inaccuracy of the entry and send the letter to the credit reporting agency. Any inaccurate entries must be removed by law, which will help buyers improve their credit score so they are better able to attain financing for the lease option home they plan to purchase.

Important Considerations to Remember

One of the biggest factors when it comes to determining one’s credit score is past payments to creditors. If a potential homebuyer has been on time with payments to creditors in the past, that will count in a positive way toward the credit score. Even just a few late payments to creditors can really lower a homebuyer’s credit score. As a result, offered mortgage interest rates may be substantially higher than those offered to individuals with good credit.

In some cases, writing a letter to the lender explaining the problem may be helpful. The individual may have dealt with a job loss or an illness that led to the late payments. While not every lender will take this information into consideration, some lenders, such as FHA lenders, will keep that information in mind when deciding whether to approve the home mortgage loan.

Caution

While some credit repair companies can be helpful when homebuyers work to repair their credit, individuals must watch out for potential scams. Companies claiming to erase credit problems may be a scam. It is not possible for companies to completely eliminate every bad mark from a credit report. Only inaccuracies can be removed when disputed. When deciding to make use of a credit counseling or credit repair company, take time to research the company and what they offer to avoid becoming involved in a scam.

At a Glance

  • Getting one’s credit in order is essential to homeownership;
  • Fixing one’s credit is essential to obtaining a good credit score, which lenders consider;
  • Inaccurate in one’s credit report may adversely affect one’s credit score;
  • Homebuyers should be careful to avoid credit counseling or repair scams.

Chapter 4: Rent to Own Homes Frequently Asked Questions

Although rent to own homes have been available for some time, many people are still unfamiliar with this non-traditional buying option. Many potential homebuyers find themselves asking questions about the lease option process and some of the important terms surrounding it. Buyers can refer to these Frequently Asked Questions and their answers when going through the process of signing a contract on a rent to own home. Keep these helpful answers handy as a guide to this popular home buying process.

Q. How do rent to own homes work?

A. Rent to own homes allow homebuyers to lease a home while reserving the option to buy the home at any time either during the period of the lease or the end of the lease. During this stretch of time, the homeowner’s hands are tied and they are not permitted to advertise the residence as for sale after entering an agreement to sell it to the prospective buyer.

There are two sections to a rent to own agreement. The first section establishes what the monthly rental payment will be. The second section of the rental agreement establishes that the homeowner is bound to sell the residence to the prospective purchaser at a predetermined price.

Q. What is the option fee?

A. An option fee is often confused with a rental security deposit, although they are not the same. This fee is paid up front at the start of the lease. In most cases, the option fee is not refundable at all, something that potential homebuyers should keep in mind.  Whether or not the prospective homebuyer decides to go ahead and buy the residence in question, the seller will still keep the fee. In some specific kinds of rent to own homes agreements, this particular option fee is applied to the buying cost of the home.

Q. How much will the option fee cost?

A. The option fee is an integral part of lease to own agreements. According to the SF Gate website, a usual option fee falls between three and five percent of the agreed upon buying price. Of course, this is just an average figure, so it can vary, depending on each unique situation. The good thing about rent to own homes is that the parties involved may negotiate the amount of the. Usually, sellers are attracted to homebuyers that can put down more money on the home.

Furthermore, the more cash that homebuyers contribute as part of the option fee, the less they will need to finance elsewhere when the lease expires and they are ready to purchase the home.

Q. What is monthly rental credit?

A. Many rent to own agreements feature a provision that sets aside a fraction of the monthly rental payments as credit toward the purchase price of the residence. This amount varies from situation to situation, yet it may be as great as up to 50 percent of the rental payment. This provides homebuyers with the benefit of creating equity while renting.

Q: Which Party pays for the homeowner insurance and the real estate taxes on the rent to own residence?

A: The party paying for both the homeowner insurance and the real estate taxes on the rent to own home is usually the seller of the property. Of course, once the homebuyer makes the purchase and takes possession of the home, the taxes and insurance costs will then be their responsibility.

Q: What should consider rent to own homes?

A: Many individuals find rent to own homes an attractive option. Previous sales have shown that the following people often consider lease option properties:

  • Homebuyers who like to invest in real estate
  • Homebuyers fed up with being just renters and want to head toward real homeownership
  • Homebuyers that want to try out a new school district or a new neighborhood prior to making a commitment to it in the long term
  • Homebuyers dealing with damaged credit and who may be currently incapable of qualifying for appropriate mortgage rates because of credit problems
  • Homebuyers who need and want time to get their finances in order before making a home purchase

Q: Is there an obligation on the part of the renter to purchase the home at the close of the lease period?

A: No, there is absolutely no obligation on the part of the renter to purchase the home at the close of the lease period. The seller gives the homebuyer the first option of buying the home, yet the ultimate decision of whether to purchase or not to purchase is totally up to the renter.

Q: Are the down payment and the monthly rent credits going to be given back to the renter if he or she refuses to go through with purchasing the residence at the close of the lease period?

A: The down payment and the monthly rent credits are going to be non-refundable. If one refuses to take advantage of the buying option, then previously money probably will not be returned. This feature of rent to own homes should carefully considered by buyers before entering a lease option agreement.

At a Glance

  • Rent-to-own homes are based on a lease of a residence with an option to eventually buy the residence;
  • The option fee will be paid up at the start of the rental period;
  • The option fee usually falls between three and five percent of the predetermined buying price;
  • The monthly rental credit is a fraction of the monthly rental payments that is put aside to go toward the purchase of the home;
  • The seller of the home pays for the homeowner insurance and the real estate taxes, then the renter/buyer eventually does;
  • Rent to own homes are great considerations for many individuals;
  • There is no obligation put on the renter to actually buy the home at the close of the lease-to-own period;
  • Neither the monthly rental credits nor the down payment are to be refunded to the renter.

Chapter 1: What Investor need to know about South Bend Rent-to-own Investment Property

For many homebuyers, and real estate investors the prospect of homeownership/property management is synonymous with the American Dream. Individuals used to work hard, save their money, qualify for a home loan and then finally purchase the home of their dreams. If only that formula was still reliably applicable to today’s housing market!

Unfortunately, due to the massive problems with the real estate market in the last few years, qualifying for home loans has become a challenge for prospective homeowners. While that might seem like reason to put off any dreams of homeownership, consumers do have other available options. In a situation where an individual cannot qualify for a home loan, they might want to look at rent to own homes, often referred to as lease to own properties.

How does it work?

Rent to own transactions differ from traditional home purchases. The potential renter enters into a deal with the landlord to buy the property by a set date in the future and at the present-day market value. While the renter is actively paying rent, considerations need to be taken in order to effectively save for the required deposit. In some of these scenarios, a renter will not only have established such an arrangement or agreement with the landlord, but also may well pay said landlord additional rent towards the deposit required to make the final purchase.

The whole point of rent to own properties is to allow prospective buyers to make the final purchase at a later date. This means is that instead of a renter just agreeing to purchase the piece of real estate at a fixed cost, he or she is smartly putting forth payments toward the eventual purchase of the residence by way of additional payments.

An Example

The following is a very simplified example to help consumers further understand rent to own homes. For instance, a buyer finds a property they like commits to a lease of two years for said property. At the same time, the buyer would then pay the owner of that residence a fee of $1000, which is called the “option fee.” This means that the intended buyer is going to occupy the residence for the period of those two years.

Within those two years, the prospective buyer can either purchase it or pass on the purchase. During that two-year period, the seller only has the option of selling that property to the intended buyer.

However, consumers considering this option should realize that they will have to forfeit the option fee” if they decide to pass up on the chance to eventually purchase the residence.

On the flipside, if the prospective homebuyer ends up buying the residence inside of the specified time period, they will routinely receive their “option fee” back in the form of a credit.

What is the Difference between Rent to Own Homes and just Renting?

Some individuals hear the term, “rent to own homes” and confuse it with renting a home? Both terms include the word “rent,” which is a cause for some confusion. It is important to realize that there is a big difference between renting a home and renting to own a home. To help clear up some common misconceptions and confusion,  the following will clarify the differences between the two real estate concepts.

Rent Money

When renting a home, the rent money paid each and every month will be lost forever. On the other hand, when going the lease option route, a fraction of the rent that is paid will be put toward the down payment or even the price of the home. The rent paid on rent to own homes is similar to a savings account. The money that is put toward the down payment or home price in a rent to own contract is referred to as “rent credit.”

Landlords

When renting a property, consumers have a landlord that probably will not want to sell the property to anybody. While one could view the seller as the landlord in a rent to own transaction, this is not a an accurate picture. It is more accurate to view the seller as a motivated seller who eventually wants to succeed at selling the home to the renter, who will eventually become the new owner.

Purchase Price

In the case of a rental property, the purchase price will never be discussed or even referred to at all since there is no desire for the property to be sold. With rent to own homes the purchase price is actually determined at the beginning of the agreement. The purchase price that is determined at the beginning of the lease will be done through something referred to as the “option to purchase.”

Repairs

With a rental property, the landlord is actually the one who is accountable for making all the repairs that the property requires. In the case of rent to own homes, this no longer applies, mainly because there really is no landlord. Since the person renting the home will be the eventual owner in a rent to own homes scenario, they are responsible for any and all repairs. After all, the renter will be eventual homeowner, so he or she will be treated as such.

Cost of Rent

If one rents a property, the ensuing cost of rent is going to be set based upon the market rates. For rent to own homes, the rent is likely going to be higher than what the normal rent would be because a fraction of it is going to be reserved either for the down payment or as a contribution towards the actual selling price. This allows the eventual buyer build up some equity as he or she is anticipating an eventual purchase.

Using RealtyStore.com

Prospective buyers interested in rent to own homes will find that RealtyStore.com offers many exciting benefits. This website allows homebuyers to use an easy search engine to find rent to own homes in any number of places right across the United States. For example, an individual may want to search for rent to own homes in Los Angeles, California:

The following quick and easy search results immediately pop up on RealtyStore.com:

Going further, buyers can then click on the search results to open up an individual property webpage:

Stay Protected

Even with rent to own homes, certain problems may come along, which is why buyers must learn more about protecting themselves effectively. It is imperative to remember never to deal with an owner who has financial problems, since they could end up losing the property while the buyer is engaged in a lease option transaction.

To guard against this situation, one could easily insert the necessary lease payments into an account that goes directly to the home lender. Of course, when a buyer is considering rent to own homes, it is important to check to ensure that both the insurance and the taxes have been paid.

At a Glance

What have we learned about rent to own homes? We have learned that:

  • Lease option deals allow home ownership for buyers who have a hard time qualifying for a home loan;
  • Lease option agreements are agreements between a renter and a landlord to purchase the home at a set date for the present-day market price;
  • rent to own homes start with a lease of the residence;
  • There is a huge difference between rent-to-own homes and just renting any property;
  • Rent money is lost forever if one just rents, but a fraction of the rent in rent to own homes is utilized toward either the down payment or even the price;
  • The seller is not really the landlord in a rent to own homes situation;
  • The purchase price is agreed upon at the start of the lease;
  • Repairs are handled by the eventual buyer in rent to own homes situations;
  • The cost of rent might be a bit higher in rent to own homes arrangements than in simple rental scenarios;
  • RealtyStore.com is a great resource for those who search for rent to own homes in South Bend.

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Next: Pros and cons for home buyers