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Considering a Rent-To-Own Property?

If you are, then there may be a few things to keep in mind from a lender’s perspective. Perhaps the main reason you are even considering this option is that you are having difficulty qualifying  for a mortgage at the present time. It may be a lack of a down payment, a bruised credit bureau report, or insufficient income to debt service your mortgage.

My understanding of a rent -to-own is that you will be required to pay a higher than normal rent with some of these funds set aside to assist with your future down payment. However, if for any reason you are still unable to qualify on the specified date on the rent-to-own contract, you will have forfeited this extra rent portion to the landlord.

As an example (illustration purposes only) let’s say that the additional rent portion was $300 and your rent-to-own contract specified for you to qualify for a mortgage in two years from now.  Over a two year period you will have “saved ” $7,200.  If, in this example, the residence is valued at $350,000, the normal down payment requirement today is  5% which is $17,500. A high-ratio CMHC insured mortgage also requires you to provide, from your own resources, closing costs of 1.5% of the purchase price. This is an additional $5,250 requirement to fulfill. Your down payment and closing costs will be a total of $22,750 less the $7,200 ($300 x 24 months) for a shortfall of $15,550. In other words, you will need to still save approx. $648. monthly on top of your rent-to-own payment for the next two years.

But what if the unthinkable happens and the Federal Government decides to increase the minimum down payment from 5% to 10% (you will now need an additional $17,500!). It’s definitely an option available to the Feds in order to keep the average house prices from getting further out of control in relation to our wages and our ability to debt service mortgages going forward. The chance that everything will be the same two years from now in the lending world is an additional risk for you to also consider.

The opportunity may be worth the risk but it’s important to consider all the facts before proceeding. I would recommend that you talk with an Accredited Mortgage Professional to get their expert advice and possibly some peace of mind. Just remember, there are still no guarantees as no one can predict future interest rates, lending guidelines, etc..