Rent – to – Own (RTO): “If” and “only If” Part 1
As mortgages have been harder to obtain and debt loads have been increasing, Rent-to-Own programs have become an option that some people turn to. While this program seems like the perfect answer, it is rarely a good idea for the tenant/owner and is almost always a great option for the Investor.
The process begins by qualifying potential tenant/owners. RTO programs look at your income and credit history and usually require at least a $5,000 deposit. If it looks like you can qualify for your own mortgage in 2 – 4 years, then RTOs find an investor that will purchase the home that you choose. You agree together on a purchase price at the end of the term. You live in the house as if it is your own and parts of your monthly rent go toward your future down payment. At the end of the term, you sign an Agreement of Purchase and sale, get your own mortgage, and buy the house for the predetermined price. Sounds perfect, right?
Let’s look at the ‘Ifs’ in this program….
Income and Credit – If, over the course of the term (2-4 years), you do not improve your credit to a score over 680 or your income declines, you cannot qualify for a mortgage so you cannot purchase the house (Unless you are working with a lender or Mortgage Broker, it is difficult to continually monitor your credit score). The Investor then has the option to sell the property, move in a family member or a new tenant – you lose your deposit and your credits and may have to move.
Qualifying for a Mortgage – If the mortgage rules change over the term (2-4 years) this may result in the inability to qualify for a mortgage in the future. For example, the government changed the maximum amortization for insured mortgages from 30 years to 25 years recently. Anyone that was qualified using a 30 year amortization must now have a higher income to compensate for the missing 5 years to qualify for the mortgage… you lose your deposit and credits and may have to move.
Jenni MacDonald (www.jmacdonald.ca) is a Mortgage Broker with Dominion Lending Centres The Mortgage Source (Lic.#10145). She has over 5 years of experience in the Mortgage Industry and works with at least 40 lenders including banks, credit unions, and private lenders to find the best mortgage for each client. You can contact her by phone or text at 613-551-0639 or via email at email@example.com.