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?
Parts of the Rent Go Toward Your Down Payment – If you do not have the full 6.5% of the final purchase price available as an initial deposit, you are charged the required amount over and above a regular market rent. This amount is determined by how much you need to save each month to have the necessary amount for a down payment (5%) and closing costs (1.5%). Let’s say the Investor’s expenses are about $1,100 per month (regular rent amount) and you need to save $300 per month for the down payment each month. Your RTO rent will be $1,400 per month. That’s a significant monthly rental cost. If you miss a rent payment you are in breach of contract and could…. Lose your deposit and credits and may have to move.
Buy The House – If you don’t like the house after living in it for the duration of the term, you cannot take those credits and purchase another house. The deposit and credits are for that property and that property alone… Lose your deposit and credits and move!
As you can see, A Rent-to-Own program has many Ifs but it can be the only answer in a few select situations. If you are an Investor looking for this type of rental program, be prepared to hold the property for many years after the term of the agreement is over. If you are interested in being a tenant/owner, please make sure you understand all the “Ifs” that can turn a great experience into a nightmare!
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 protected]