For numerous reasons, alternative financing arrangements may appeal to you when buying a home. Two popular methods are rent-to-own and seller financing. Many people confuse these two concepts. You may be unsure of just how each works, in addition to which one may be best for your situation. Let’s take a closer look at both.
When it comes to renting to own, you as the renter or future buyer are given the chance to buy the home at a later date when you are better prepared financially to do so. Until that time arrives, the owner acts essentially as your landlord and is responsible for paying the mortgage payments. You will likely enter into a contract which spells out the terms of your agreement with the owner.
Often times, you will pay a non-refundable deposit at the beginning of the agreement. This deposit, in addition sometimes to a small portion of the monthly rent, may count as your down payment toward buying the home at the end of the established contract period. The contract period gives you time to improve your credit or finances in the hopes that you will then be able to finance the home’s purchase. Should you not be able to obtain traditional financing at that point, you may lose your down payment money or the seller could allow the contract to be restructured, granting you more time.
Seller financing is a concept that benefits both buyers and sellers. It allows buyers to get financing when they may not otherwise qualify and sellers to move their property more quickly than if they wait for a traditionally qualified buyer. In this kind of arrangement, the seller acts as a banker and offers credit to the buyer. Should you decide to choose this option, you would sign a promissory note laying out the agreed upon terms and then a mortgage or deed of trust is filed with the local authority that handles public records.
This type of financing can be tricky in terms of financial and legal issues, but it can be done. Perhaps the biggest risk is that the contracts associated with seller financing usually come with a five-year balloon payment, meaning that the financed amount will be due in full after a five-year period. The logic behind this is that you will have enough equity in the house and a better financial situation so that you can then obtain bank financing on the amount due.
In both types of arrangements, you would be paying the home owner until you are able to establish a financial situation that allows you to get a loan. The difference between the two is with regard to when ownership is transferred to you. There are risks in both situations. When renting-to-own, you risk the seller not paying mortgage payments and losing your home to foreclosure. In either case, you could lose your entire deal if you are unable to make monthly payments for some reason. Sellers also incur risk in non-traditional financing deals.
Before signing any agreements or making decisions regarding these types of home financing, always talk to a professional such as a real estate attorney.