Rent-To-Own: How To Do It
Owning a home is not the right choice for everyone. Do you like a maintenance-free lifestyle and enjoy the freedom of moving around the country? Then renting might be the smarter choice. But owning a home comes with financial benefits, especially for those who plan to stay in their home for seven or more years.
First, owning allows you to build equity. Equity is the difference between what your home is worth and what you owe on your mortgage. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. The more equity you have, the bigger your profit when you sell. You can also borrow against your equity with a home equity loan or line of credit. This is an affordable way — these loan products typically come with lower interest rates — to access a hefty sum of money to fund a home renovation, pay down your high-interest-rate credit cards or cover a portion of your child’s college tuition.
Owning a home can also help you build wealth. It’s not guaranteed, but your home might increase in value while you own it. Say you bought your home for $300,000. Seven years later, it might be worth $400,000. If you sell when your home is worth more, you can walk away with a solid profit.
Making the move to ownership
But how do you make the move from renting to owning? First, you’ll need a strong credit score to qualify for a mortgage with the lowest interest rate. Most lenders consider FICO scores of 740 or higher to be incredibly good and those of 800 or higher to be excellent. You want your score in that range when you apply for a mortgage.
You can build such a score by paying your monthly bills on time and paying down your credit card debt. Those two steps can provide a steady increase in your score.
Reducing your monthly debt load can help too. Most mortgage lenders want your recurring monthly installment loan and credit card payments — including your mortgage, student, auto and personal loan payments and your minimum monthly credit card payment — to equal no more than 43% of your gross monthly income. The lower this debt-to-income ratio is, the better your chances of qualifying for a mortgage with a low interest rate.
Lenders also want to see that you’ve built savings. You’ll need to save enough to cover your down payment and mortgage loan closing costs. But lenders typically want you to have saved an additional amount equal to at least two mortgage payments. That way, lenders figure, you’ll be less likely to miss mortgage payments if you suffer a temporary financial setback.
This could equal quite a bit of savings. Consider that a 5% down payment on a $300,000 home comes in at $15,000. Your loan’s closing costs can run an additional 2% to 6% of your mortgage loan amount. As you can see, you’ll need to save a sizable amount of money before making the move from renting to owning.
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