When to Consider a Rent-to-Own Arrangement

The purchase of a rent-to-own property is a great way to enter the world of homeownership. If you are either short of a full down payment and/or closing costs, or find yourself with credit challenges, this may be the way to go for you.

A rent-to-own program, which may also be called a land contract, is entered into by you and the seller/landlord. You live in the property and pay rent, with the option of purchasing. You’ll pay a deposit at the contract signing and you’ll both agree to a closing date when you will purchase the property. In some cases, the landlord will apply a portion of your rent to the down payment and/or closing costs, so you really have an incentive to make the program work.

Time frames

Time frames on rent-to-own agreements can range from a few months to close to a year. Buyers with a credit problem, such as a previous bankruptcy, may require more time to be able to requalify to purchase a property and will be at the longer end of the time frame. Another reason for a longer term would be to enable the purchaser to pay down debt so that his or her income ratios would then fall in line with lender requirements.

Rent-to-own shouldn’t be lightly undertaken: On the agreed-upon date, if you haven’t closed, the seller could either determine what you need to do to complete the process and extend the date, or bring in a new tenant and keep your deposit.

Have an action plan

Ideally, before you enter into one of these agreements, you should be working with a mortgage professional to create a plan of action, so that you have a clear idea of what needs to happen. But whatever the case, rent-to-own programs offer opportunities that may not be available to you otherwise, and are well worth looking into.

Qualify For your Mortgage With These Income Sources

In qualifying for a mortgage, there are several sources of income you are able to use. But note: Regardless of the source, you will need documentation indicating either that you’ve received this income for two years, or that you expect to receive it for the next three years or more. In addition to the traditional hourly/salary sources of income, others that may be used are:

  • Commissioned/self-employed: A minimum of two years of documented income must be provided on signed federal tax returns. A 24-month average will be calculated to determine a usable monthly income for the purposes of qualifying for a mortgage. Lenders are most concerned with self-employed borrowers’ adjusted gross income (their income after write-offs.)
  • Rental property income: This also requires two years of documented income supported by tax returns.
  • Social security/pension/disability: Even if you have just started receiving any of these through monthly installments, as long as you can prove that you will receive them for at least three years, you can use them as income. With these forms of income, the amount will be “grossed up” to account for the fact that taxes usually aren’t withheld from them as they are with other types of income. To establish gross monthly income – which you can use for income to qualify for a mortgage – multiply your monthly check by 125 percent.

Also note that unemployment benefits, while still considered a payment stream, have end dates, and therefore can’t be used as income in obtaining a mortgage.