Dave Ramsey Warns of a Dangerous 'Plot Twist' You Could Face With Rent-to-Own Homes. Here's What It Is
- Rent-to-own is one approach to purchasing a property.
- You get the right, or the obligation, to buy a home after a certain period of time.
- Dave Ramsey warns that if you don't have the money to buy the home outright when your lease is over, or can't qualify for a mortgage, your option to buy the home may expire.
Be aware of this risk before you consider a rent-to-own home.
Rent-to-own is one approach to buying a home, but it's not a conventional approach. Basically, if you opt for a rent-to-own arrangement, you enter into an agreement with a property owner that enables you to purchase the property you are renting at the end of your lease term. Depending how the contract is written, you may have the option to buy or the obligation to buy.
Once you've entered into a rent-to-own agreement, you make rent payments that are usually above market rate. The excess money you're paying enables you to acquire equity in the home. Since you already have an ownership stake, when it comes time to buy, you may be able to qualify for a mortgage more easily without making an additional down payment.
Rent-to-own can open the door to becoming a homeowner sooner if you are having a hard time saving for a down payment or qualifying for a mortgage. But finance expert Dave Ramsey warns that a "plot twist" could end up costing you if you take this approach.
Here's the "plot twist" Dave Ramsey warns about
The Ramsey Solutions blog explains how you could end up faced with a very unpleasant surprise if you opt to try to purchase a home using the rent-to-own method.
"Unless you save up enough cash to buy the house outright when your lease ends, you'll need to get a mortgage when it's time to buy the property," Ramsey explained. "But -- plot twist -- if you don't qualify for a mortgage, the option to buy the home could expire."
See, your rent-to-own agreement will generally have a specific time deadline for when you need to follow through with actually purchasing the property. At that time, you'll have to pay the seller the total outstanding amount due.
Usually, the final purchase price is specified in your initial rent-to-own contract, so you'll have to pay the difference between that price and the amount of equity you've accrued during the rental period.
If you don't have the cash to pay that full amount, you'll need to get a mortgage to pay for the home. If you can't get a mortgage, this plot twist could cost you a lot. You'd be out all of the extra rent you paid during your lease term and wouldn't end up being able to buy the property after all.
Should you try out rent-to-own anyway?
It is undeniable that there is a big risk in using rent-to-own to purchase a home. If you can avoid this method and simply wait a little longer to save up a down payment and buy a home the traditional way, you may end up better off.
There's less chance of an unpleasant and costly plot twist in that situation. That's because you'll be in control of deciding when exactly you've saved enough money and improved your financial credentials enough to qualify for a mortgage and move forward with buying.
But if you don't feel that's an option and you really want to rent-to-own, make absolutely certain you do everything you can to get a loan when needed. This includes keeping your income steady, avoiding taking on more debt, trying to save up for a larger down payment, and working to improve your credit.
At least by taking these steps, you'll reduce the chances of being denied the loan you need to move forward with your plans.
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