Insight into Rent to Own

Ioffersolutions Real Estate Service Inc.

How Our Rent to Own Works

If you have been thinking of getting into a rent to own but aren’t quite sure how it all works, then I hope this quick info session will clarify things for you.

The program is designed for people who don’t qualify for a traditional mortgage today; maybe they fall in one of the following categories;

• No Credit
• Bad Credit
• Bankrupt
• Foreclosure
• New to the country
• Self Employed
• No down Payment

Or any other reason the lender gives you as to why they won’t let you buy a home. 

To understand how the Rent to Own works, we must start by taking a look at the traditional home purchase.

TRADITIONAL HOME PURCHASE

Let’s say you are looking to purchase a $300,000 home today.  Typically the bank would require you put a minimum of 5% down, which is $15,000.  When you give the bank the down payment you then have a mortgage of $285,000 ($300,000 – $15,000) that you will amortize over 30 years or so at whatever interest rate you can get at the time.  For today’s example let’s assume the following information:

• Interest rate of 4%
• Amortization period of 30 years
• Taxes are $2400 per year
• Insurance on the home will be $600 per year

Based on this information you would have a monthly payment break down that looks like this;

Mortgage (Principle and Interest)     $1355.23

Taxes per month                                 $  200

Insurance per month                            $   50

Total Monthly Payment                      $1605.23

Now, because of any one of the reasons listed above, you may not be able to get a mortgage on that home today.  For our example let’s say that after meeting with a mortgage broker and a credit coach it is determined you will need approximately 2 years to build your credit.

RENT TO OWN HOME PURCHASE

With the majority of Rent to Own programs you are going to buy the home in the future so you will be paying a future appreciated value.  For most programs they will appreciate the homes between 4%-5% per year of the term.  Most settle on 4.5% because that is the National Average based on CMHC statistical data over the time they have been in business.  This can also vary based on the area of the country you reside.  Typically this is where the Investor or the Rent to Own Company makes its money.  However many home owners have gotten themselves into some serious financial difficulties and actually owe more on their home today than it is worth, so this is a great method for them to sell their homes and not having to pay the bank the short fall.

Let’s now take a look at how the Rent to Own would typically work if you used the same $300,000 home with taxes of $2400/yr, insurance of $600/yr, and for simplicity we are going to use an appreciation of 5% per year, which works out to be 10% over two years.  (makes it easier for my math)

First, let’s look at what the purchase price of this home would be at the end of the 2 year term using a 5% appreciation per year.

Calculating the appreciation:             $300,000 x (5% x 2 years) = $30,000

Calculating the end purchase price: $300,000 + $30,000 = $330,000

Now that we know the end purchase price is going to be $330,000 we can then determine how much the bank or lender is going to require as a down payment when we go to purchase the property. 

Down Payment Calculation:             $330,000 x 5% = $16,500

Calculating how much you will end up financing: Purchase price – Down payment = Finance amount

$330,000 – $16,500 = $313,500

Once we know how much of a down payment we are going to require at the end of the Rent to Own, we are able to now structure the Rent to Own. 

If we were to use the same set of criteria as above, we can then determine what our monthly payment would be when you went to qualify to purchase the home at the end of the rent to own.

• Interest rate of 4%
• Amortization period of 30 years
• Taxes are $2400 per year
• Insurance on the home will be $600 per year

Mortgage per month:                          $1490.75

Taxes per month                                  $  200

Insurance per month                           $    50

Total Monthly Payment                       $1740.75

So we can see in our Rent to Own example, with $16,500 down payment we can expect our monthly payment to be $1740.75.  Now the big question is, what if I don’t have the full $16,500 at the beginning, can I still get into a home on the Rent to Own program?  The answer is YES!

Let’s say you only have $10,000 today and would like to get into the home while you are working on your credit over the next 2 years.  Here is how your Rent to Own would be structured.

We know it takes $16,500 at the end to be used for a down payment.  Since you have $10,000 today we need to help you accumulate another $6,500 ($16,500 – $10,000) over the next 24 months.  If we take the $6,500 and determine how much we need to save each month we calculate you will need to save an additional $270.84 per month ($6,500 / 24 months).

Your monthly payment would then look like this;

Rent:                                                                       $1740.75

Additional Option Payment (Rent Credit)          $  270.84

Total Monthly Payment:                                        $2011.59

At the end of the 24 months you have accumulated the $16,500 that is needed for your 5% down payment to purchase this home. 

Now that you know how to calculate the numbers on Rent to Owns, you can run various scenarios based on how much money you have up front to go towards the future down payment and how much you will need to save each month to get the 5% required.