For many would-be homebuyers, saving for a down payment is a challenging proposition. Less-than-stellar credit history can create an obstacle to getting a mortgage, making the whole process even more daunting. For a homebuyer in this situation, a rent-to-own arrangement can be an appealing option as a pathway to pursuing homeownership.
So let’s say this sounds like your situation — and you like the idea of rent-to-own. But you aren’t sure whether a program exists to help you get your foot in the door — or even how to find a rent-to-own home that works for you.
Well, here’s some good news: there are multiple rent-to-own programs that exist to help you get into that home, and even help you find it, too! We examined a range of programs for you to explore and consulted an experienced agent to help you understand what’s available and whether it’d be a good fit for you.
Through the Home Partners program, prospective rent-to-own homebuyers start by filling out a pre-qualification application. If approved, they move to submit a full application. This step includes a credit and background check, income verification documents, and requires an application fee.
Buyers will need to meet Home Partners’ minimum FICO requirement, which varies by market, and a maximum debt-to-income ratio (DTI) of 45% to be approved.
Once approved, Home Partners lets buyers know what their maximum allowable monthly rent will be. Then the home seeker works with licensed real estate agents of their choice to find the right home for them.
“Home Partners is affiliated with various brokerages and can get them connected to a Realtor®. I happen to be on their list,” explains Ellen Williams, a top-selling agent who works with 66% more single-family homes than the average agent in Joliet, Illinois. “So after they are approved, I call the client, and we talk about the process, and we go shopping and look for a house they like.”
You can either search for homes on the program’s website or choose from a wide variety of properties in communities that Home Partners serves — as long as they fit the program’s investment criteria and your budget as the home-seeker. These are the criteria for properties within Home Partners’ parameters:
- Homes must be located in approved communities around the country.
- Properties must fall into the categories of single-family homes and fee-simple townhomes.
- They must be traditional sales or for sale by owner (FSBO) homes.
- Homes must be listed at a price point between $100,000 and a metro’s designated maximum purchase price (which Home Partners sets).
- The home must have two or more above-grade bedrooms on a lot of two acres or less.
“Home Partners doesn’t really want to purchase homes that back up to big tension wires, or homes that might be difficult for them to sell in the future,” Williams notes based on her experience working with the program.
Once you find a home you love within the criteria, your agent submits it to Home Partners to review. Next, Home Partners makes an offer to the seller. If the seller accepts, Home Partners buys the home. Prospective residents then must sign a one-year lease for the home as well as a “right to purchase” agreement, similar to a lease option agreement, that gives you the right to buy it later if you want to.
Home Partners property management company, Pathlight Property Management, prepares it for tenants to move in. Residents have the option to purchase the home at any time during the lease. If you do not renew the lease and don’t choose to buy the home, you can then move out without penalty.
The program has set minimum and maximum home prices in each metro area; these range between $60,000 and $550,000. “These help us ensure the homes we buy are move-in-ready while giving our customers the best chance of buying their homes back at the end of their lease,” Divvy Homes co-founder and C.E.O. Adena Hefets told HomeLight.
Would-be Divvy participants apply for the program and get underwritten for a home budget. Divvy requires a minimum FICO score of 550. Buyers then work with a local real estate agent to find a home that meets their needs within that budget. Divvy purchases the home in cash, and the home seeker puts down between 1% and 2% of the purchase price as an initial home savings contribution, similar to a down payment. (In rent-to-own scenarios, this is known as an “option fee.”)
During their three-year lease, about 25% of each monthly payment goes toward the program participant’s home savings, building to between 3% and 10% of the home’s purchase price — enough for a mortgage down payment.
The tenant is able to buy the home at any point during their lease with no penalty or fee. If the program participant chooses not to buy their home, Divvy will return their home savings, minus a relisting fee (2% of the home’s original purchase price).
Dream America accepts applicants who have the income and funds needed for an FHA or VA loan, but who can’t qualify because low FICO scores or other issues make it too challenging to get a mortgage. With this program, the minimum credit score is 500, with a 50% maximum DTI.
Dream America operates in Atlanta, Dallas, Jacksonville, Orlando, and Tampa. Approved participants in the program can pick any house available for sale in these communities within their budget at a price of $150,000 or higher.
Dream America buys the home and leases it to the home seeker for 12 months. At any time that the participant qualifies for a mortgage, they can cancel the lease with no penalty and buy the home. Dream America credits 10% of rent paid toward the home purchase.
Program participants pay an onboarding fee of 1% of the home price as soon as Dream America is under contract to buy the home.
If the renter still needs more time at the end of a 12-month lease, they can renew for another year as long as they have been paying their rent on time each month.
Local and regional programs
Williams advises that there may be an array of additional programs available to would-be rent-to-owners in their local areas. She suggests searching online to identify potential local programs — and even keeping eyes peeled for billboards or other print advertisements.
If you pair up with a national, regional, or local program that suits your needs, you might just find that rent-to-own is your ideal path to homeownership!
Header Image Source: (Aubrey Odom / Unsplash)