At Last, The Secrets of Rent-to-Own Homes

At Last The Secrets of Rent-to-Own Homes- 150x150The real estate market has several solutions for both home buyers and home sellers. One solution for those who wish to buy a home, but don’t have the money for such a large purchase yet, is renting-to-own, also known as a lease option. People who choose this option will pay rent for the home that they live in, but are given the possibility of purchasing the home at a later date. The rent that people who choose the lease option will have to pay is higher than a regular rent, but the advantage is that part of the rent will be credited to the buyer if he or she decides to purchase the home.

A rent-to-own agreement allows the buyer to purchase the home that he is currently renting at any time before the agreement expires. The length of time in which the home can be purchased can be a few months or even years. Because the rent is higher than usual, sellers can afford to take their property off the market and rent it. However, if the renter decides to buy the property, he or she will be credited with a portion of the rent. This sum of money can be put toward a down payment and closing fees, or simply used for something else. If the buyer is unable to or decides not to buy the property during the lease option period, the entire amount that was paid as rent over the past months or years will remain with the seller.

Advantages and Disadvantages of Rent-to-Own Homes

The rent-to-own option is advantageous to sellers because it gives them an alternative to lowering the price of a home that they are having problems selling. By making a rent-to-own agreement with a buyer, sellers know exactly how much money they will be making if the buyer decides to go ahead and make the purchase. If home prices go down during the lease option period, the asking price for the seller’s home will remain unchanged, and the buyer might still want to buy the property because he or she has already invested money in it by paying a higher rent. The seller is also at an advantage because the rent money can be used to pay the mortgage, property taxes and insurance. Also, a renter who signs a rent-to-own agreement will most likely take better care of the property, because they are planning on buying it in the near future.

Buyers are advantaged by the rent-to-own option because it allows them to buy a home if they don’t have the money for the down payment, or their income is not sufficient. If a buyer believes that his or her income will increase in the near future, renting-to-own allows them to have a roof over their heads while having the option of buying the home at a later date, when their financial situation improves. Buyers are also protected from a home price increase during the lease option period, because the price of the home will be locked in.

Buyers also have almost all the advantages that regular renters have, like not having to worry about repairs, property taxes, and homeowners insurance. Another advantage of renting-to-own that the buyer has is that, by living in the home for a long period of time, he can find out if there is anything wrong with it. If buyers decide to walk away from the deal, they only lose the extra amount of money that they paid over regular rent, but if they decide to buy the home, they will be credited with a portion of the rent that they paid.

Like everything in the real estate world, renting-to-own also has its disadvantages. Most disadvantages are things that could go wrong with the rent-to-own agreement. Here’s what you should keep in mind and look out for:

  • The seller’s financial situation. Try to find out if the seller is in any financial trouble. Red flags can be spots on his credit report, phone calls from debt collectors, or letters sent to the house. If the seller is in trouble, he can lose the home while you are still renting it. Meaning that you will lose the extra money paid as rent and you will have to find a new place to live.
  • Repairs and maintenance. The rent-to-own agreement between you and the seller should clearly mention which party is responsible in case of damage to the property, and who is responsible with maintaining the property. During the renting period, you should have the same rights as any renter, meaning that the owner should take care of repairs and maintenance.
  • The end of the rent-to-own period. If home prices have increased, the seller might not want to sell anymore. Unless you have the money to hire a lawyer and sue the seller, there is little you can do, so this is one of the risks that you are taking when renting-to-own. Also, if home prices go down and you want to buy the home, you will still have to pay the price that you and the seller agreed upon.

Renting-to-own is a good alternative for home buyers who expect their financial situation to improve in the near future, but not such a good option for those who are unsure of their income in the following months or years. Renting and saving money for the down payment can be a better choice than paying more for rent than having to abandon a home because you don’t have enough money to buy it.

Short on Cash? You Still Have Down Payment Options!

Short on Cash-You Still Have Down Payment Options-150x150Taking out a mortgage loan can be very expensive for most home buyers. Between all the fees and the down payment, you will usually have to spend tens of thousands of dollars before you can even move in your new home. The down payment that you make on your purchase will influence how much your monthly payment will be, and also how much you will be spending overall on your mortgage loan. Many times, the down payment will be the only thing standing between you and home ownership. Coming up with a large amount as a down payment can prove to be very difficult for most people, but, fortunately, there are alternatives that can help you.

The obvious thing to do is to take out money from your savings or sell some or all of your investments to come up with the money for the down payment. But sometimes that’s not possible, either because you have no savings or investments, or simply because you don’t find that to be a good option. In this article, you will find out about other down payment options for when you are short on cash.

Government Insured Mortgage Loans

Government backed mortgage loans, like the Federal Housing Administration (FHA) loans, the United States Department of Veterans Affairs (VA) loans, and the loans offered by the United States Department of Agriculture require a very low or no down payment. Besides this advantage, you won’t be required to pay a higher interest rate or Private Mortgage Insurance (PMI) because you didn’t make a down payment or your down payment was too low.

FHA loans are designed to help people with low incomes, who couldn’t afford a conventional mortgage loan. The loan is insured against default by the Federal Housing Administration, and requires a minimum down payment of 3.5 percent, which is significantly lower than the 10 to 20 percent required on conventional loans.

VA loans help current or former military members become home owners much easier. The loans are backed by the United States Department of Veterans Affairs, and require no down payment to be made by the home buyer who qualifies. The interest rate on a VA loan is comparable to the rates on a conventional loan.

USDA rural development loan are designed by the United States Department of Agriculture in order to increase home ownership in rural areas. Like the VA loan, there is no down payment requirement on a USDA loan, but the loan can only be used to purchase property in a rural area.

Take Out Cash from a Retirement Account

In order to come up with money for a down payment, you can also withdraw cash from retirement accounts, such as IRAs or 401(k)s. If this is your first time buying a home, you can withdraw up to $10,000 by yourself or up to $20,000 if you have a joint account with your spouse. Unless you have a Roth IRA, the money that you withdraw will be taxable, but you won’t be required to pay an early withdrawal penalty.

Taking out money from a 401(k) can also be done without paying a penalty, but your employer will have to okay the withdrawal, and the money will have to be returned within 5 years, with interest.

Get Help from Your Family

Many young home buyers receive help from their families when buying a home, especially if it’s the first time. The money must be received in the form of a gift, which can cover part or all of the down payment. However, you will have to provide your lender with proof that the money used for the down payment was a gift, and not a loan. A letter explaining the relationship between the person that gives the money and the person that receives it and the purpose of the amount given as a gift must be sent to the lender before they can approve the gift as a down payment.

Get Help from Your Employer

Some companies and organizations have come up with programs that are designed to help employees become home owners by giving them the money for the down payment as a low interest loan. These types of loans are like a second mortgage, so you will probably have to come up with part of the down payment. This makes them only useful if you want to make a 20 percent down payment and avoid paying for Private Mortgage Insurance.

Use the Equity in Your Home

Only applicable if you are buying a second home, using the equity in your home is a viable option of coming up with the down payment for a new home purchase. Using the equity as a down payment can be done in two ways: by doing a cash-out refinance or by taking out a home equity loan.

As you have read in this article, there are other options that can help you if you’re short on cash and can’t afford to make the large down payment that will make your interest rate lower and help you avoid paying for Private Mortgage Insurance. It would be a shame for the down payment to be the only thing to come between you and buying your dream home, so, hopefully, these alternatives will make becoming a home owner easier for you.

How to Avoid Ridiculous Private Mortgage Insurance Rates

How to Avoid Ridiculous Private Mortgage Insurance Rates- 150x150When buying a home, you will usually have two choices: you can make a 20 percent down payment if you have the available funds, or you will have to pay private mortgage insurance (PMI). The private mortgage insurance will protect the lender in case you default on your loan.

Paying private mortgage insurance may sound like a simple way to buy a home if you can’t afford a hefty down payment, but you may actually be better off opting against PMI.

Reasons to Avoid Private Mortgage Insurance

Private mortgage insurance makes great sense for lenders, as it protects them in case you can’t afford to make your mortgage payments anymore. But for you, the home buyer, it has a few big disadvantages, which should determine you to try and pay the 20 percent down payment instead. Here are the reasons why you should avoid paying PMI:

  • The cost. Private mortgage insurances usually cost between 0.5 and 1 percent of the entire mortgage loan amount. This may not sound like much, but, on a $200,000 loan, you would end up paying up around $2000 per year, and that’s not exactly pocket change. With the average price of a house in the United States being over $200,000, you would be paying around $200 more per month on top of your mortgage payment.
  • Not tax-deductible. This is not always the case, and it depends on you and your spouse’s income. If you and your significant other earn less than $110,000 per year, than the PMI is tax-deductible. However, if you file your taxes separately, the limit is only half of that.
  • Hard to cancel. When the equity in your home reaches 20 percent, you won’t be required to pay private mortgage insurance anymore. Unfortunately, canceling your PMI is not as easy as you might think. You will be required to request the cancellation in writing and have your home appraised, and in most cases this process can take as long as a few months.

How to Avoid Private Mortgage Insurance

Because private mortgage insurance is mandatory if you don’t have the required down payment, the best way to avoid it is by finding a way to pay the 20 percent. If, however, there is no chance of coming up with the down payment, some lenders still offer a 80-10-10 piggyback mortgage loan, which can help by using a second mortgage and your down payment to make the loan-to-value ratio of the first mortgage smaller.

Alternatively, you could build up equity in your home, and apply for a PMI cancellation, but this may take a while as you will be required to have your home appraised. Another way in which you could get rid of private mortgage insurance is by refinancing, but this only makes sense if the new loan doesn’t require PMI and you qualify for a lower interest rate. Refinancing can be very costly, so you will need to do your homework before you go down that road.

Private mortgage insurance is expensive and it is recommended to pay the 20 percent down payment instead of thousands in insurance. The alternatives must be weighed carefully, as they could turn out to be more expensive than private mortgage insurance.

What is the Difference Between a VA Loan and a FHA Loan?

fha and va loans-150x150Buying a home involves a long term financial commitment, so it is important to know the difference between a Veteran Affairs mortgage loan and a Federal Housing Administration mortgage loan. Both types of loans are insured by the government, and have a few similarities, but knowing the differences can save you a lot of money and headaches. While both types of loans follow guidelines written by government agencies, the final lending decision will still be made by lenders, such as banks and credit unions. Their requirements could be a lot stricter than the ones made by the government agency.

One of the similarities between a VA loan and an FHA loan is that they both are designed to provide people with lower incomes the opportunity to become home owners. Because VA and FHA loans are insured by the government, they will pay in the event of a default. Another factor that makes these two types of loans similar is the low credit score requirement. Compared to conventional loans where an almost perfect credit score is required, these loans are much more lenient. Statistically, most people that choose a VA or an FHA loan would not be approved for a conventional loan.

Differences between VA Loans and FHA Loans

While VA loans and FHA loans have a couple of similarities, there are some differences that you should be aware of before deciding which type of mortgage loan to go with. Here is what you should keep in mind before deciding between a VA loan and an FHA loan:

  • Eligibility. In order to qualify for a VA loan, you will have to be a veteran, an active-duty military member, or the surviving spouse, in some cases. Some requirements regarding time served in the military also apply. Also, if the retirement was dishonorable, you will have to pass a review before being eligible for a VA loan. FHA loans do not carry these types of restrictions.
  • Income. Because FHA loans are designed to help people with low or moderate incomes, there are only a few restrictions regarding your income. VA loans do not have such restrictions.
  • Down payment. FHA loans require a minimum of 3.5 percent as a down payment, while VA loans do not have a minimum down payment requirement.
  • Loan limits. Both VA and FHA loans have limits. Based on the cost of living in a certain area, the FHA limit can exceed $700,000. Limits are also determined by the type of home that you are buying. VA loans don’t have limits on the home value, but they are determined by eligibility criteria.
  • Fees and closing costs. While both types of loans feature lower fees and closing costs than conventional loans, FHA loans come with specific closing costs, and VA loans with more flexible closing costs and fees.
  • Mortgage insurance. Mortgage insurance must be paid for a minimum of 5 years on an FHA loan. This can drive the overall cost of the loan up by a large amount. VA loans are not required to have insurance.

VA loans and FHA loans are designed to make buying a home more affordable, but there are some big differences between them. If you qualify for both types of loans, you should take into consideration all these differences, whether they regard the qualification requirements or each program’s advantages.

Down Payments

down-paymentBetween finding the perfect house to buy, searching for affordable home mortgage rates, deciding on a lender or broker, and making sure the credit scores are in good order, there is the down payment challenge for the potential home-buyer to factor into the financial formula. It is easily one of the most difficult of hurdles for the home-buyer to manage, and even more so for those in the lower range of income bracket, and those contemplating purchasing a home for the very first time. Luckily, many lenders are becoming more flexible in granting approval with smaller down payments.

Generally, lenders require a range between 5, 10, or 20% of the purchase price, with a few 0%-down loan programs available. If a borrower can offer funds in the 25 – 30% range, then lower credit scores can be less of a factor, along with income verification. If a borrower falls below these thresholds, the lender will more than likely request private mortgage insurance, or PMI, to cover the risk. The bottom line strategy is – the more money down, the lower the monthly payment, or, the more ‘house’ a borrower can consider buying.

In simple terms, and following the required 28% monthly payment-to-income ratio, and the 36% debt-to-income ratio, a benchmark monthly mortgage payment of $933 can be used as an example. With an interest rate of 7.5% applied to a 30 year fixed-rate loan, the total principle would be $133,435.45. By offering 10% down on the loan, the mortgage payment would cover a home costing $148,262.00. Offering 20% as a down payment would boost the ‘available’ home purchase price to $166,794.

With this in mind, it is also best if the borrower has the necessary down payment funds secured at least 60 days prior to beginning the application process. In addition, it is wise to forgo or postpone other cash outlays or credit applications, as well as making sure sufficient funds for the closing costs are on hand, and the credit scores have been reviewed and mistakes rectified for the best chances for lender approval.