How Much Can I Afford in a Rent-to-Own House?

When looking to acquire your first/next home, whether via traditional purchase or rent-to-own, it is important for you to understand how much can you afford and find the correct balance that ensures success.Find the right fit.  The objective of any good rent-to-own / lease-purchase program is to allow you to live in the property while you work on getting fully qualified for a mortgage at the bank on a property you are eventually going to own.  It is important that you can get a mortgage to complete the purchase at the end of your lease, otherwise what’s the purpose of Rent-to-Own? You might as well just continue to rent and not risk losing your down payment and monthly rental premiums! So the property needs to be affordable, which means properly "sized" to meet your financial capabilities.  To succeed, you need to have the correct information and expectations up front.  Read on...

So, the short answer to How Much You Can Afford depends on the same number of factors in getting a mortgage today, which include most importantly your gross household income, your fixed monthly debt obligations, your available down payment, and the mortgage interest rate when you are able to qualify. This calculation is based on two simple rules that banks use to determine how much of a mortgage you can afford. The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees. Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments. For example, for a gross household income of $5000/mo, housing costs should not exceed $1600/mo (32% of $5K) and total household payments should not exceed $2000/mo (40% of $5K). This means if you have more than $400/mo in other payments, the house you can afford gets smaller because you can’t exceed $2000/mo in total payments! This is very important to understand, because it is high debt load that stops a lot of people from getting ahead. Get rid of or tame the debt and you have more monthly cash to put towards the home of your dreams. It’s that simple. Note that we have also viewed income as a constant in this equation. You and I both know this is not always the case. To get a mortgage, lenders look for stability and reliability of your income.

Your objective in deciding to pursue a Rent-to-Own program is to help bridge the gap between where you are now financially and where you need to get to by the end of your lease in order to complete your purchase, while living in the home that you will ultimately purchase. Sadly, the criteria of a number of rent-to-own vendors is simply the size of your down payment and how much you can afford to pay monthly with no regard for the condition of your credit, future income, or forecast debt levels. Talk to your mortgage broker and ask him or her to suggest the property you can likely afford given your current income and debt levels. Where the value of the property is less than desired, you still have choices, though they may be difficult. You can adjust your expectations, wait until you have higher income, save for more down payment, decrease your debt load, or continue to live where you are. You should only get a rent-to-own property that you can reasonably afford and ultimately buy.

Topics: Rent-to-Own, Buying a home, Debt Servicing, Pre-qualification