People are finding that the housing market is slowly turning around, thanks in large part to the economic upswing that has slowly been taking place over the last few months. Interest rates are at an all time low, but the value of housing is slowly going up. Bank foreclosures have been high in the last couple of years, but things are turning around – albeit slowly.
Rent to own lease contracts are being signed by many, and reality is that these rent to own options are the best choice for people that are interested in buying a house. This option allows prospective homeowners to be able to put down rent money every month in order to live in their home, and some of that rent will go towards the closing costs of the house.
Own to rent, however, is a step backwards for most homeowners, as it will be their bailout should they get too far in debt with the banks. This option will allow the homeowners to sell the deed of their home to the bank, which will then cover all of the insurance and taxes costs associated with owning a house. The bank, however, will allow the occupants to continue living in the house, as receiving rent payment is much better than trying to sell bank foreclosures.
For those that are trying to get ahead in life, the rent to own option is the step forwards that they need, while the own to rent option is the helping hand that will get them out of serious hot water. The bank is allowing this option for those that are 2 to 4 months behind on their payment, as well as those that owe more on their mortgage than their home is actually worth.
Yes: it’s possible, but not guaranteed.
So how do you do it? After the foreclosure or short sale, your credit rating will likely be much reduced. The first and most important step in getting back into the housing market is rebuilding your credit rating to raise your chance of qualifying for a new mortgage. Raise your credit rating to a point even higher than you strictly need for getting a mortgage, since the higher your credit rating, the lower the interest rate and fees you’ll pay and the more favorable terms you’ll get, which saves you money and reduces the chance that you’ll ever have to foreclose or a short sale again.
Rebuilding credit usually takes time – at least 24 months is a commonly cited figure – but it’s possible to do it in less time if you’re aggressive enough in your rebuilding efforts.
Consider Using Less Financing
Another way to buy a home after a foreclosure or short sale is to get a mortgage with less financing. This means that you need to make a larger down payment on the home: the larger the down payment, the sooner you’ll be able to get the new mortgage.
Of course, it’s still a good idea to rebuild your credit rating, since this will get you your new mortgage faster still. To make a larger down payment you’ll need to save some money, but you’ll be saving it for an investment into a new home. Also, once you have your new home, keep saving money so you won’t have to worry about ever needing to foreclose or short sell again. This way, you’ll have money set aside for hard times, and you may even be able to pay off your mortgage early, which can save you a lot of money in the long run.
Shop Around and Be a Smart Investor
Another important step in buying a home after a foreclosure or short sale is shopping around for the best mortgage quote you can get: look at at least three different lenders or brokers. Review quotes, compare them and choose whichever one works best for you. Also, be sure to choose a home in the home buying process that is not beyond your means and that offers a good chance of appreciating in value over the years. You’ll save the most money and maximally reduce your risk of ever going through foreclosure or short selling again if you choose a home below your means. Financial security is worth it.
Consider Using the FHA
Another option to consider is to apply for a mortgage backed by the Federal Housing Agency, or FHA. Typically, you need a credit score of 720+, proof of income and a down payment of at least 5% to get a mortgage not backed by the FHA. With the FHA, the necessary credit score drops to 620 and the down payment drops to 3.5%.
Think about Rent-To-Own homes
Renting to own may also be a good alternative. Don’t worry, this is not the much-hyped furniture rent-to-own scam with high interest rates. This is a lease option agreement where the tenant/homebuyer pays monthly rent, but a portion of that amount goes toward a potential downpayment. Two years later (or three, etc. as stipulated in the rent-to-own agreement), the tenant can buy the property, leveraging the saved-up downpayment. (You can shop for rent-to-own homes at RealtyStore.com).
The downside of an FHA-backed mortgage is that it will charge you a higher interest rate, so be sure that your income is secure and that you’ve saved up some money for emergencies before you sign up for one. However, if you have the steady income and savings for a new mortgage but don’t yet have a high credit score, the FHA can help you return to homeownership sooner.
Improve your credit rating as much as possible, consider making a larger down payment and shop around for the best mortgage quote. Also, look for a home at or below your means that will probably appreciate in value and consider applying for an FHA-backed mortgage.
In the current economic climate, buying a home has become a more difficult proposition. Mortgages are extremely difficult to get, even for those who have fair credit rates, not to mention those who have less than perfect credit.
Since it’s harder than ever to buy a home, one new option that is becoming a popular choice for those who dream of having their own home is the lease option.
This option gives potential homeowners the ability to move into a home without throwing away money on a traditional rental agreement. The lease option comes with some great benefits to both homebuyers and sellers as well as some great economic and community benefits as well.
Understanding the Lease Option
First, you may be wondering what a lease option is. Simply put, this option refers to a situation when a potential homeowner decides to rent a home for a specific time period and then is given the option the home when the rental period is up. The price for the home is predetermined, which means potential homeowners can lock in the purchase price in the beginning. In some cases, this is referred to as the rent to own option as well. While it’s not a new concept, it has recently seen a huge rise in popularity, since easy mortgages are a thing of the past.
How Rent to Own Works
When you decide to go with the rent to own or lease option, there are some specific steps that will be followed. First, before you ever move into the home, the buyer and seller will have to agree on the purchase price of the home. Other terms for the sale are agreed on at this time as well. The next step is for the buyer to pay a special fee to the seller in order to lock out other buyers. This gives them the right to buy the home and prevents the seller from being able to rent or sell the home to someone else.
After the purchase price is agreed upon and the lease option fee is paid, then the buyer can move into the home. For the agreed on length of time, the buyer will pay rent to the seller. In most cases, this rental period lasts between 1-3 years. Some of the rent that is paid during this time will be put towards the price of the home. This rent to own credit will reduce the amount owed when the buyer is ready to purchase the home. For example, the rent may cost $800 a month. $400 of that rental amount may be designated to be the rent to own option credit. This means that over two years, the seller will have accumulated $9600 that will go towards the purchase of this home.
Lease Options Help Homebuyers and Sellers
The great thing about the lease option is that it offers homebuyers and sellers some clear advantages:
It provides a win-win situation that both will benefit from when choosing this option.
The homebuyers will benefit from having extra time to improve their credit and to come up with a way to finance the home. Sometimes this can include saving for the down payment on the home as well. During the process, homebuyers have a place to live, which is a huge advantage.
The seller also enjoys some advantages when going with the rent to own option.
They can take the home off the market and enjoy rental income while knowing they will be selling their home. It’s also fairly easy to find people who want to enjoy this option, which keeps buyers from spending months trying to deal with the hassle of selling the home.
Economic and Community Benefits
Of course, the lease option provides some great economic and community benefits as well.
One way this is helping the economy is that it is helping to keep the real estate market moving. Those who have gone with the rent to own option in the past few years are now seeing their lease mature and they are going on to purchase the home. As people continue to choose a lease option, it offers a great way to keep the real estate market moving in a time when it’s extremely tough to get a mortgage. Also, since this keeps homes from sitting empty, it helps to boost prices for other sellers in the area. Empty homes sitting around drive down real estate prices, but the lease option helps to keep people in these homes.
Last, even the community benefits from people taking the lease option. This option puts families in homes instead of letting homes stay empty, which drives down home values in the area and can be a magnet for crime. In the end, the homeowners, sellers, economy and the community can all benefit from people choosing the rent to own route.
Times Have Changed
Buying a home is nothing like it was twenty years ago. Between the residential property market taking a nose dive and financial institutions wrapping you up in Federal regulation red tape, many potential home buyers are taking a hard look at FSBO that offer owner financing. This method is being made attractive by sellers that feel compelled to sell property as quickly as possible. FSBO is appealing to sellers that realize the slim margin of equity in their property. By cutting out pricy realtors and extending handsome owner financed terms to buyers, a loss can be avoided.
Options such as rent to own, buy on contract, and balloon financing by FSBO individuals can replace the rejection of a mortgage company when your credit is less than pristine. Without paying a financial institution to do all the discovery work in putting together a lengthy package, a more manageable financed price can be achieved.
In a FSBO with owner financing, the seller takes over the job of making sure all the legal aspects of a property are addressed. This task is usually inexpensive and eliminates the need for closing costs. This type of action on the part of the seller protects his/her interest in the financing structure as a FSBO and assures the buyer that the Agreement is credible. The agreed upon price is solid, interest rate and terms are favorable and the stress almost non existent.
A Huge Difference in Banks and Owner Financing
If you have purchased a home within the past five years, you know the intensity of credit checks and personal scrutiny. The financing always includes extra hidden costs and the two-hour closing session contains more paperwork than you could ever possibly read. Countless Agreements and Contracts, Addendum to Agreements and Contracts, Disclosure Statements, Tax Transcripts, Hold Harmless Forms, and Affidavits are just the beginning of a journey that can make you wonder if you have made the right choice.
Within the past year, banks have also increased their policies to be even more strict on home buyers looking to finance. A 20% down payment is now the norm plus tax statements from the past five years. An above average credit score still puts buyers in an unqualified position for the lowest rate possible.
The FSBO individual will, in many cases, require a down payment but less than 20%. Proof of income, duration at present and past jobs and talking with references are normal with owner financing. Credit checks are not as critical as with banks but stability may be looked for.
Owner financing is more than just a handshake but the paperwork is decreased, payment schedule simplified and a win-win situation for both parties is reached. Outside of a Contract or Agreement and a Truth in Lending Disclosure, the terms are clear cut. The buyer is free to have any documents looked over by an attorney, hire a home inspection company or take any other steps that may cause them worry over the property deal.
FSBO Tips for Buyers
While owner financing may seem fantastic, take these steps to protect your future home:
- Ask for a copy of the Title Insurance. This proves that no other parties are involved in the property.
- Request a recent survey that shows boundaries to avoid arguments with neighbors over property lines.
- Talk with area residents casually for any indication of problems such as drainage, pesticide service trucks or city employees.
FSBO and owner financing is becoming the wave of the future for buyers that want to own a home and by knowing what to expect can make the transaction go smoothly, saving you lots of money.
You can learn a lot more about For Sale By Owner (FSBO) and owner-financing at RealtyStore.com.