Planning out a budget for your Rent-to-Own home is similar to preparing for a standard home purchase with some slight variations. The type of planning necessary for RTO differs in that it's largely more strategic than meeting specific underwriting guidelines. When you sign the lease-purchase agreement, you are setting the stage to create your ideal credit profile or develop a down payment, so your budget planning should reflect this idea. You're budgeting for what you want and how to get it, rather than what you have lined up. Here are some important considerations to get your budgeting on the move:
Planning budget. Having a strategy and sticking with it is key to success when entering a Rent-to-Own agreement. Too many people who aren't successful didn't do the necessary preparatory work before getting started. Many more jump into RTO homes that are outside their budget from the start. The first step in any RTO is figuring out how much money you can put into the home, as well as how much your debt and credit load will allow you to receive in a mortgage at the end of the lease term.
How much you can afford. Many people think that their Rent-to-Own monthly budget should be based on how much they can afford or how much their current rent is. A wiser way to consider your budget is how much you can expect to receive in a mortgage loan at the end of your lease term. Meeting with a loan officer before you start shopping for an RTO home gives you a good perspective on what your options are.
Market potentials. While studying the local market and lending conditions may not seem like a budget concern, they can factor into your Rent-to-Own home in a variety of ways. Understanding which neighborhoods are building value and those that are flat will help you develop an investment and give you an idea of where to appropriately lock in your final sale price. Because Rent-to-Own involves a degree of uncertainty--you enter on the assumption you'll be ready to get a loan in a year or two--studying market predictions on lending conditions is necessary to ensure you're making a smart decision. Currently, interest rates are at a historic low and lending restrictions are loosening, but you need to consider where you'll stand if the lending environment changes.
Down payment, monthly. Rent-to-Own agreements are versatile and can be designed to help you develop whatever component of your financial profile that is preventing you from securing a mortgage loan. Whether that means growing a down payment or rebuilding your credit, you can structure your lease agreement to help you. FHA loan guidelines require a 3.5 percent minimum down payment, so your rent credit (on top of the rent you are paying) should add up to at least that amount. Don't forget to take into consideration closing costs, which often can be added to the mortgage but do add a higher price tag to the final process.
What you need to get a loan. There are a variety of different loans available to aspiring home buyers. Learning which you qualify for--and which will give you the best rate--is key to Rent-to-Own success. If you think you qualify for a FHA insured loan, here is a quick primer on what you need to know. If not, there are a variety of considerations to take into account when shopping for your loan, outlined here. Keep in mind that one of the most important factors in securing a loan, aside from down payment, is your DTI ratio. This ratio compares your debt load and income in two ratios and plays a major role in the underwriting process. Home buyers often focus on the credit score and neglect the DTI, creating difficulty down the road. Don't forget the DTI!
Budget smart--other issues that may come up. Homeownership is a game of surprises. Make sure when you are budgeting that you aren't pulling your finances too thin, and ensure that you are able to save an emergency fund for when expensive things need to be repaired. Major costs like furnace replacement and roof repair can sneak up on you and budgeting your expenses wisely can make them seem like far less of a hit.
And of course, talk to a pro. Before entering in any Rent-to-Own agreement, speak to the experts. Talk to your loan officer to ensure you are on the path to securing a mortgage before you sign on the dotted line. Consider speaking with a real estate lawyer to ensure your lease-purchase agreement is up to snuff as well.