How to Determine The Length of Your Lease Option
When you buy a home through the rent to own process, the most important aspect is determining the length of your option. This is the amount of time you spend renting while getting your finances in order, fixing credit scores, saving up a down payment, or deciding if you really want to buy a home. While ultimately the seller controls this time period, you need to know what your situation truly warrants before you enter a lease option agreement. You should always walk away from a seller who has unreasonable expectations on the length of your option.
Each rent to own buyer has a unique situation so today We will dissect each case separately and explain the range of time needed for the circumstance. The one overarching tenet of this process is that you should absolutely without fail be working with a mortgage broker from day 1. This will ensure that you will be able to buy the home at the end of your lease agreement if you choose to do so.
Bad Credit: 12-36 months if no bankruptcy or foreclosures have occurred.
In determining the length of your option you need to know how long it will take to fix your credit rating. With a few small credit dings containing a couple of late payments you should be able to raise your credit score significantly in 12-24 months of on time payments along with the reduction of overall debt. With more severe credit problems containing lots of missed/late payments along with some debt being sent to collections it could take 18-36 months to rectify your scores. If you have any major credit flaws like a bankruptcy, foreclosure, repossession, it can take 3 years or longer to get your score high enough to get approved for a loan. If you have poor credit we suggest you meet with a qualified credit counselor as well as a mortgage broker before you even think about signing a rent to own contract. They will be able to give you a more exact timeline for your score improvement as well as when it will be possible for you to qualify for a loan.
Checking Out The Neighborhood: As long as you need, if finances are in order.
Many people look to use rent to own as a means to check out an area or neighborhood before committing to buy a home. If this is your only reason for utilizing rent to own the determination of how long your option should be is personal decision. However, it can take up to a year or longer to really get to know an area. To speed this process up you will want to do a lot of research on schools, crime rates, economy, traffic, and anything else that affects your daily life. In addition to doing your research and finding a house you want own, be sure to meet with a mortgage broker to get your finances in order so you can get a loan when the time comes.
Down Payment: 12-36 months, be sure to do the math!
Buyers often utilize the rent credits and down payment assistance frequently found in rent to own agreements in order to save up enough money for a down payment. This is a great option for young home buyers or those on tight budgets. To calculate the length of the option needed if saving up a down payment is the missing link to your home purchase you need to do several things. First, meet with a mortgage broker as discussed in previous scenarios and find out what kind of down payment you will need to get financing how much you can afford etc. After you have these variables you simply do the math on how long it will take to save up the required amount. If you are planning on including saved money outside of rent credits as a part of the down payment it is crucial to get on a household budget and allow 3-4 extra months in case it takes longer than expected to save the money.
Lowering Debt: 12-24 months depending on debt levels and income.
With mortgage regulation under extreme scrutiny a buyers debt to income ratio has to be at a reasonable level before you can be qualified for a loan. In this scenario the length of your option is based off of how long it will take for you pay your debt down to an acceptable level. In todays market an acceptable debt to income ratio should be around 38, in other words the total housing expenses plus outside debt should only amount to 38% of the buyers total income. Determine your timeline using debt pay off calculator as well as a monthly budget to achieve the pay off on time. Just like down payment savings debt payoff should be given several extra months of breathing room, just in case of unexpected events.
Lease Option Length, An Art and a Science
Entering into a rent to own or lease option agreement is not something that should be taken lightly and if you fail to execute your option within the timeline decided you can lose your down payment and rent credits. The average option length including extensions can be anywhere from 3 to 5 years so make sure that you can fix all issues preventing you from a traditional home purchase in that time frame. The easiest way to do this is before you start looking for homes to meet with a mortgage broker, get on a budget, seek credit help if necessary, and get educated on the process at our resource center.