Here is a collection of questions we hear often about rent-to-own transactions and our general thoughts and observations on what appears to be normal.
1) How much money do we need for a down payment?
The down payment required is typically a function of the purchase price and is subject to negotiation between the buyer and seller. Generally, we recommend that it not go less than 3% or $5000, which ever is greater to ensure all participants are serious. If you have the capacity to go higher then the monthly rental premiums will be lower. In either event, the objective is that the combination of the two will accumulate to the required down payment for lender financing at the end of your lease and option term.
2) Does the down payment go towards the purchase price?
This is a normal expectation - when you buy, ensure your entire down payment goes towards the purchase price.
3) Can my monthly rent payments go towards the purchase price?
No, according to lender rules and CMHC, you must establish and pay a basic monthly payment at "market rent". Anything you pay above market rent can go directly towards the purchase price. It’s like putting money in the bank.
4) Why do we need to pay more above the rent?
As in the answer to the first question above, the combination of down payment and monthly rental premiums are typically calculated to enable you to accumulate the required down payment for lender financing by the end of your lease and option term.
5) The down payment is too high!
The intent of the down payment is to weed out those that are not serious about or financially capable of home ownership from those that are. Remember, you are going to tie up the owner's house for the term of the lease and they want you to be serious about concluding the transaction. Do your best to work out the down payment if you for sure want to be in a rent-to-own program. For example, many buyers borrow their down payment from a relative or parent willing to help. Others have some things with value that you could sell or we could accept in trade. You might even be able to make extra payments over a short time frame to get to the minimum down payment.
6) The monthly payment is too high. Can you lower it?
Owning a home is serious business and expenses are real and often higher than renting, not to mention that you need to save your down payment. Consider if you will be making more money in the next few months with a raise or more hours. Or maybe you’ll be paying some debt off? Either of these will help you to afford the payments. Alternately, play with the numbers, perhaps with a bigger down payment or an increase in the end purchase price. Most importantly, don’t get into a transaction your simply can’t afford!
7) What if we can’t qualify in time?
This is why it is so important to listen to a mortgage broker’s analysis and recommendations. There should be no reason or doubt in your mind why you wouldn’t get qualified if you follow the advice as outlined, otherwise don't consider rent-to-own. However, life happens and this question is a discussion you should have with the seller and get it in writing. You may be able to negotiate that as long as you keep making the monthly payments you can’t be asked to leave. The trade off may be that at the end of the option term that you agree on, your price lock will expire and the purchase price will likely be adjusted to stay even with rising home values. Another solution is to get someone who can qualify for a mortgage to buy it instead.
8) Who pays for repairs?
Negotiate into your option agreement, anything you have a problem with in the first 30 days the seller will take care of 100%. After 30 days, it’s up to you just like when you own a home. You call the repairman, not the landlord. One of the conditions of most lease-option agreements is that you will be responsible for repairs. But make sure the seller will fix everything for the first 30 days so that you are comfortable that the house is in excellent condition.
What other questions do you have? Post them here!