With a “rent-to-buy” situation, the gap in time between setting up the contract and actually buying the house, it appears based on research that lenders fear that their buyer will be locked into a condition that may not suit them in the future.
Interest rates may be low today, but locking into the current rate could keep them from benefiting from an even lower rate in the future … or they could lose the money they set aside if they do not follow through on their contract to buy.
One would think that the buyer could lock into a current market purchase price with this option but to the contrary, it seems that the owner wins on this detail as well, because the two parties “guestimate” as to the potential price the house would have two to three years from the forming of the contract, so I don’t see the purpose of this option as far as making it a win situation for the buyer.
Many “rent-to-buy” deals are between owner and renter, but it is wise to bring in the lender and get advice on the contract so that it includes details such as home repairs, improvements, holding the money, how much the rent is and what the amount extra will be going toward the earnest money deposit, down payment and closing costs.
Locking on price can end up giving one or the other the advantage, depending on the market in two to three years when the sale takes place. This is like a roulette wheel, I think. The owner wins if the tenant rents and then buys because now the owner can move forward on his own plan and has someone paying mortgage on his old place and the landlord is holding money paid on top of the rent towards the purchase of the old place.
This is secure for the owner.
However, the buyer is not secure at all, and this is why the lender does not favor this option for their customer who regardless of the out come, must pay the lender back. If the renter backs out, the owner will have a win as well, because the deposit will be his by default.
The renter/ buyer is paying the mortgage on the house and extra in bits and pieces which makes buying a house easier because few people can come up with $20,000 to $40,000 for a down payment, especially someone who just foreclosed, as their rate of interest will also be higher.
A better option is if the buyer sets aside money to buy a home down the road, the buyer would actually have more options about picking a property at the time of purchase, than two years prior when the house may not have suited the buyer at the time of purchase.
Being locked into a purchase, as with the rent with option to buy, that will take place two years into the future may not always turn out the way the parties planned. But the buyer can have the best of both worlds and rent a small apt, save money monthly, keep to a small budget and then buy a foreclosure 2-3 years down the road. This way they get more house for the price, pay most of the mortgage in the down payment and have saved the most money overall.
The buyers can decide to do this by socking away a good 10 to 30 percent of their income toward the hefty down payment. If they meet with an agent early in the process and layout their financials, create a reasonable budget, plan the months it would take to save and reduce any other debt, the buyer can start researching the area they can afford. They could start looking at homes in auction to see price tags, go to auction and see bidders and learn how to present a clean bid through their agent. This would prepare them and help them to understand the process.
Foreclosure.com could certainly take these buyers and prime them for this process.
A rent-to-buy option would not help the buyer to save money, but would only inflate the price of the rent to include the costs of purchase on a regularly priced house and though they could lock into today’s interest and prices, currently very low to stimulate the economy, who is to say these could not come down more in the future.
To spend more than they have now in the hopes of saving little by little for a house that is not a foreclosure is a waste of time and money. The houses are not as reduced as one would have hoped with the economy as low as it is and the houses, most being bank owned, could become reduced in price further since there is a current glut.
Foreclosure or a government-backed program would be the way to go, in my own opinion. Money, these days, is not as easy to earn. To make the money we made in the past much more skill, labor and time is required, because businesses are harder pressed. This in turn makes the consumer more cautious, apt to work harder for a better deal, and apt to do more research when it comes to major purchases.
The less precarious or risky, the better the option.
I think that if the lender, who is going to finance the buyers, could hold the money in escrow with interest, this would make the plan more secure. This would be the same lender that would in the end pass them their hefty down payment when the swift transaction were required by the auctioning bank. No penalties would be incurred if the buyers after two to three years, backed out because of a change in their circumstances.
Another option the boomerang buyer could look into would be the FHA “Back to Work” program or government-backed program referred to earlier. This program is a government-backed program to help these homeowners get back into a home again.
It allows the buyer a low interest rate while being allowed also a low down payment (3.5 percent). This means that all the buyer has to prove is that they lost the house because of having lost 20 percent of their income for at least six months during which time they were unable to pay their mortgage.
The rate at which these boomerang buyers step back into the market is low but experts think they must be credit worthy by now since it has been several years since their foreclosure, lien, or short sale for them to recover.
Because the boomerang buyers are not looking into buying but currently renting, the interest and housing prices still don’t reflect a high demand in the market so to purchase now would be a good thing to do because the market has favorable circumstances for these buyers. Using this program, on top, would put the boomerang buyers back into a house because now they get a lower down payment and even lower interest rates to boot.
But, I think housing prices could still bottom out in the future, because people are more careful about making commitments, due to the crunch in jobs and delay in hiring and reduced salaries. The hourly may be on the rise but schedules are also being trimmed and benefits cut at work.
According to the FHA guidelines, the buyer need only be a year from having had their bankruptcy, foreclosure, deed in lieu of foreclosure or short sale. The government is trying to make the idea of buying a home for these previous owners as simple as possible to put them back into their house and stimulate the housing market as well as get the economy back on track.
Lenders and boomerang buyers are excited about this program. The government and lenders are happy to work with previous homeowners to get them back into their own house.
However, if the buyer waits too long the demand will increase as the wave of buyers becomes more prevalent and this will drive the prices and the interest rates back up and though the government is willing to offer them a sale with as low as 3.5 percent down payment, if the price increases then so will the down payment and if the interest rates are low now, which they are, and the government offers these buyers even less than what is market then the same thing will happen when the rates go up because of demand.
The formerly low government rate will also increase along with the market rates. The buyer should take advantage of this program as quietly and swiftly as they can if they have the income to secure a house and they can prove they qualify for the FHA “Back To Work” program.
It is apparent from the research below that as long as the buyer is aware of the stipulations of any of the above ways to purchase a house in the future, they can secure a house relatively soon. If the desire to live in a house is immediate then the rent to own option is the way to go, however, try to make sure that the contract does not give the current owner of the house all of the benefits and do some shrewd negotiations outlining the current state of the house, the two- to three-year timeline where money will go to the up keep of the house while you rent it and what money on top of the rent is to go where and how much those costs will be when the house is purchased.
If the buyer can wait a little while and try to get more house for their money, they can be trained by a foreclosure company and a plan can be hatched as to what money is required and how the money is going to accumulate and where the money will sit until the buyer gets the bid on the table with the help of the agent from the foreclosure company.
This option would require a lot of discipline from the future buyer to secure a reasonable budget and plan that would secure them the hefty down payment they would need to make a smart purchase in the future and take advantage of the quantity of foreclosures on the market.
If the buyer does not want to wait but has passed their year since their last house ownership and they can qualify with the FHA “Back To Work” program then perhaps this is the best option for them to enter into a house now and enjoy the low down payment and lower interest rate promised to them by the government-backed program. They won’t have to sacrifice their living for several years, and they won’t have to pay someone else’ mortgage as a renter but can walk in to the house and buy it outright with the help of the government.
The buyer may have to pay the current market price but will enjoy the low down payment and lower interest rate.
In the end, the options outlined above that would suit the buyer would depend on the buyer and his/her level of sacrifice and how much the buyer wants to save versus how much quality of life they want now and if they want to spend a lot of time and effort learning how to get more for less.
The buyer would have to weigh their current lifestyle and decide which lifestyle they can see for themselves in the future.