How does rent to own work if you have bad credit?
There is no doubt, if you have bad credit, purchasing a home can be challenging. But before you throw in the towel, learn about how rent to own works when you have bad credit.
Example: let’s say you can’t qualify for a mortgage because your credit score is too low and debt-ratio too high.
The first step in qualifying tenant buyers for a mortgage is to make sure that clients can reasonably reach their goal of homeownership, within a reasonable amount of time.
After reviewing the application, terms will be determined. These terms depend on qualifying for the option-to-purchase (which typically ranges between 2-4 years.) However, tenant-buyers have to qualify to exercise their option to purchase. What that means is that of the two contracts they sign when they enter into the rent to own program (Lease Agreement and Option to Purchase) they have to have the ability to be able to purchase. Let’s say that at the end of three years you want to back out, that means that you don’t exercise your option to purchase and you lose whatever money you put into the deal (e.g.: down payment, plus rent x the number of months you lived in the residence.)
The next step is putting a plan in place that outlines step-by-step action that must be completed before qualifying. Typically your mortgage broker will walk you through a plan that prioritizes the order you should pay debts off. This is designed to bring your credit score up and your debt-ratio down. In most cases, the mortgage broker will complete the pre-qualifying process about six months prior to the end of the rent to own term to make sure that you still qualify.
Finally, there are many follow-ups to make sure that everything is on track with your finances. If something has changed, typically the investors will offer an extension on the agreement; however, the options are dependent on the mortgage type.
If you have a question about our rent to own program or real estate investment here in Calgary – get in touch!