Purchasing a new home is supposed to be one of the most rewarding events of your life. But what happens when the dream isn’t quite lining up with reality? Most of us have been there at some point. You’re working, but your pay barely covers expenses. Do coins stuck in the couch cushions count as savings?

Owning a home doesn’t have to be a pipe dream. There are options for those who don’t qualify for a traditional mortgage. Rent-to-own is gaining popularity across the country, with providers springing up to assist people on the road to homeownership.

This article will give you all the information you need. You’ll learn about the qualifications a rent-to-own company will want, the step-by-step process, and some tips for getting ready to apply for that mortgage.

Perhaps most important of all — you’ll learn about the potential pitfalls of entering a rent-to-own arrangement.

Rent-to-own: The Basics

  • You apply with the rent-to-own business and get pre-qualified for your spending budget.
  • You and your realtor select a home (within the set budget parameters of the company).
  • The company puts in an all-cash offer to secure the house.
  • The company then leases the home back to you, and you can purchase that home within a set timeframe.
  • Many will also give you a percentage of your rent back as credit.
  • A typical closing can happen in as little as two weeks, and a client can go from the application process to moving into their new home in one month.

Dream America’s rent-to-own dos-and-don’ts

Livabl spoke to representatives from Dream America, to gain insight into the rent-to-own process.

Dream America provides a pathway to homeownership to clients in the metropolitan areas of Atlanta, Dallas, San Antonio, Jacksonville, Orlando, Sarasota, and Tampa. Its goal is for clients to achieve homeownership through its program within a six-to-18-month time period, by focusing on the client’s obstacles and providing them a roadmap to get there.

Can you tell us a bit about Dream America?

Dream America started in 2018 after looking at the homeownership trends in the U.S. and the rental housing market. There were potentially 35 million renters that want to buy a home but can’t currently qualify for a mortgage. So, we’re trying to offer an excellent solution for people to own the home of their dreams.

With the Dream America program, once approved the client can choose from any home that is available for sale in one of our approved towns and communities. Dream America then rents it back to the client until they are ready to purchase.

We underwrite for a one-year time frame with that specific goal in mind. What we mean by that timeframe is basically within six to 18 months. Dream America identifies the client’s individual needs and budget both upon applying and through underwriting, we then determine what obstacles the client must overcome to give them a path to homeownership.

We have a lot of experience and work with our clients both individually, and with independent lenders when needed to get them mortgage ready and then purchase their Dream home as soon as the client is ready.

The minimums to qualify are a FICO score of 500 plus, a household pre-tax income of $4,000 per month, $5,000 to $10,000 or more available from savings, 401k or gift, a debt-to-income ratio of up to 50 percent, a 12-month track record of paying rent on-time, and they must be a U.S. citizen or Permanent Resident Alien.

Underwriting will review the verified income against a client’s payment obligations to see what they have available for a housing payment. Underwriting will also review their credit history to see if any problems are behind them or they are having trouble meeting current obligations. In addition, if their FICO is below 550, the client must have a minimum of $8,000 cash available.

Dream America does make rare exceptions to the criteria as we have found these qualifications to be the bare minimum to accomplish their goal of homeownership within a 6-to-18-month timeframe. We do also credit our clients with 10 percent of all on-time rent paid back to the client as a closing credit toward the purchase of their home.

Young couple carrying big cardboard box at new rent-to-own home

Dream America sees clients from a wide variety of ages and backgrounds (Photo credit: BalanceFormCreative)

What types of buyers does Dream America typically see?

We see several different types of first-time homebuyers. Some have done their homework and know their income history isn’t where it needs to be. Or they have been renting, and the rental house they are currently in is being sold. So, they’re thrown into a new situation.

Perhaps it’s a matter of having a recent pay increase or if self-employed their income has increased but the history is not there. They need additional time to save. It may just be a few issues but when combined, this has stopped them from moving forward on a purchase. We are potentially a great fit for clients like these.

There’s another type of first-time homebuyer that we see every day those who have gotten caught up with everyday life and all else they are trying to accomplish. They may have a job in the business world, and they’ve done well, but they haven’t saved, or they got way ahead of themselves in terms of credit and, before they know it, they’re married, perhaps with a first child on the way.

They know they do not have a qualifying score, but just do not know what to do to improve their score, or what needs to be done to get to become a homeowner. This is a great fit for us. If qualified, they will join our program, and we will work on getting them mortgage ready, or in many cases the time they need to work on savings or season income.

We also see a decent number of military veterans joining our program. Adjusting back to civilian life may be difficult. And for those, for a variety of reasons they may have, Dream America is a potential fit.

We also see a lot of retirees. Maybe they have been renting and now they would like to have a home so their grandkids and kids can visit. We also see many retirees that have owned previous homes and now are currently renting but need help getting back on track to become homeowners again.

Perhaps they’ve moved from the northeast to Texas, Georgia, or Florida, and they rented at first, but now it’s been several years. They’d like to purchase, but maybe there’s an issue with getting there.

People being transferred from one state to another, or those who may be moving from one state to the next due to retirement are another type of client that we see every day.

For example, let’s say a client is selling their home in Pennsylvania and has the cash to join our program. But their home has not sold yet, and they will need that cash to purchase their new home in their new state. Or perhaps their debt to income will not support having two mortgage payments. So, they will join our program, and use Dream America to purchase their Dream home in their new state until they can sell their old home.

There are many reasons that lead to obstacles to homeownership. It might be due to a low credit score, or maybe it was a job loss. We have seen a lot of instances in the past two years when people lost income due to COVID. Perhaps the income history is not there due to switching from W2 to self-employment. Maybe there was a job loss or medical issue.

Dependent upon mortgage loan type there are different seasoning periods for things such as bankruptcies, short sales, or foreclosures, and different time periods depending upon mortgage type and income type regarding income history. When these issues occur with clients, it is a great potential situation for us to come in and help. We think of ourselves as a stepping stone from point A to B — that’s Dream America.

Can you tell us about the Dream America pledge clients must sign?

There are several points. The first is ensuring that becoming a homeowner is the client’s priority. We want them to be committed to improving their credit scores. Understanding that paying rent on time is a huge qualifier for obtaining a mortgage in six to 18 months, whenever they will be mortgage ready. One of the most significant points is no late payments for any reason. Pay all bills on time every month. One missed payment can lower your credit score by 90 points.

We ask them not to apply for any new credit lines. We have had a few truck drivers who needed a new truck to expand their business. We ask our clients just to give us a call before they go through with it. Let someone from America approve it. Most likely, it’s not an issue.

Do not close existing credit accounts because that’ll significantly lower your score. Then there are hard credit pulls. We want to see as few as possible when they’re leasing from us. Sometimes, clients don’t know, and then they try to buy a new car — that hard pull knocks them out of credit score contention.

In year one, we offer a one-year lease with a six-month, six percent price increase and up to 12 months with a 10 percent increase. In year two, that option is another five percent. It becomes costly to purchase the home if you go beyond three, four, and five years.

That’s why we do the pledge. We keep clients on the straight and narrow. We remind them there’s no magic sauce — they must be an active participant, and if they hire a credit repair firm and expect them to wave a magic wand, it’s most likely not going to happen. You must make those on-time payments, keep utilization rates low, and have the math line up. Our experience and our numbers have proved the effectiveness of our program. Our current conversion rate is about 75 percent.

Can you tell us a bit about the roadmap you provide for clients?

We have different roadmaps depending on which obstacles a client is facing. But in terms of the roadmap, we talk it through with them and track it with them. For example, if it’s just a matter of credit score, we will provide a roadmap with tips. If a client has a higher credit score when they apply, the terms offered by a mortgage lender will be better.

To boost your FICO score, please continue to pay all your bills on time every month. It’s the number one driver of your credit score. Keep your utilization rates below 50 percent and optimally below 20 percent. How much of your credit line do you need to use? Again, keep it below 20 percent. If you have high balances on your credit card, start paying them down and work to keep them below that scenario so you can start boosting your credit score.

What about credit repair companies? Are there other options?

We’d use credit repair firms whenever FICO improvement was necessary during our early years. We don’t want to tie anyone’s hands. We’re not forcing people to use credit repair firms, but we suggested it in many situations.

We quickly learned that, yes, if you’ve got a lot of things on your credit or you were a victim of fraud or theft, the credit repair companies could clean up and dispute items.

But everything that a credit repair is doing can be done by yourself. They’re fee grabbers whose goal is to sign clients up and charge monthly fees. Then, after two or three months, everything is done. So, what were they doing after that? Telling clients to pay their bills on time and never miss a bill. Keep your utilization rate low.

If all you have are two credit cards and you don’t have a fixed line, think about opening an additional line of credit outside of credit cards that could help you boost your credit score.

Check in with a mortgage lender that can do a credit simulation — have them run it and see what can be improved on FICO. These are some of the steps we’ve added to our roadmap in the steps necessary because we found that credit repair companies, everything they were doing, one can do on their own, and it wasn’t rocket science. Best of all, you’re avoiding those monthly fees.

Companies like Dream America are streamlining the process for rent-to-own clients, making it easier than ever to own a home, despite certain hindrances like a low credit score.

If you’re interested in rent-to-own, check online to see which companies in your area might be able to help. Some are regional, while others work nationwide. Some will have extended periods in which you can rent before purchasing the home, and others will have a tighter timeframe.

Some companies also offer the option to walk away from the purchase.

Again, it’s best to consider your wants and needs before deciding which company to choose.

So, you think you’re ready to rent-to-own? Hold up — there are a few more things you need know and some pitfalls to keep in mind.

Young couple moving into new rent-to-own home

Go into the rent-to-own process with the same diligence you’d apply to a traditional home purchase (Photo credit: Lordn)

The pitfalls of rent-to-own

Beware of the landlord who’s looking to sign you to a home that needs major repairs. Regardless of a home’s condition, you’ll be on the hook for everything that needs to be done. If the home requires a lot of work, it could potentially end up costing you far more than you anticipated.

Read the fine print. Some landlords will offer you a credit towards your home via your monthly rent, but they may not be applying all that credit towards your eventual purchase.

Let’s say the average rent in your area for a home your size is $2,000 per month. But your landlord is charging you $2,500 per month. Don’t automatically assume that the extra $500 is going toward your purchase. There may be details in the fine print that you receive a credit of only $300 per month, with the other $200 ending up in your landlord’s pocket. Always be certain of the exact amount that’s going towards your purchase each month before signing on the dotted line.

Beware of the non-refundable upfront fees. In rent-to-own agreements, you’ll be asked to pay a one-time payment upfront. This can be referred to as the option fee, option consideration, or option money. The purpose of this fee is to prevent anyone else from buying the home while you’re leasing it. This option consideration can vary, typically between one and five percent.

You can think of it as a down payment towards your new home. If you go ahead with buying the home, this fee will go towards the purchase price. But if you decide to walk away, this fee is often non-refundable. This is another case where it pays to read the fine print. Be sure of your agreement’s terms and keep it in mind if you think you might not be 100 percent sure that you will buy the home.

Don’t skip the home inspection and appraisal. You need to treat your rent-to-own agreement in the same manner as a traditional purchase. Approaching the agreement with an abundance of caution will pay off in the end. That’s why it pays to get an independent home inspection and appraisal. You’ll find out the truth about the home’s condition and you can decide whether the amount of work required fits your budget.

Meanwhile, the appraisal will let you know exactly how much the house is worth. This is particularly important if you’re locking in the purchase price of the home at the time of the agreement. If the house is worth less than its purchase price at the end of the lease, you’ll be on the hook for the difference. You’ll also need to weigh the appraisal amount versus what the landlord is charging. If you feel you’re being gouged, keep looking.

To protect yourself from a few common rent-to-own scams, make sure that property taxes are paid up to date and there are no liens on the property. Ensure the landlord truly owns the home and can legally rent to you before you hand over any funds. You can do this by reviewing a recent tax bill, the title to the property or a recent mortgage statement.

Before you sign the agreement and pay the option fee, have a real estate attorney review the agreement and explain your rights as a renter. Make sure you understand what happens if there are any missed or late payments.

Rent-to-own may seem complicated, but it’s as easy as applying online to see if you qualify. Then, your company of choice will take it from there.

If approved, you could move into your new house within the month. That’s the happy reality of rent-to-own.

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