There is good and bad news in this present real estate market. First, experts are declaring that now is the time to purchase a home, which is great news for many Americans–
Now is the time to buy, but that opportunity may be slipping away. For people who have a job and money, a dream house is within reach, writes Marc Roth, founder of Home Warranty of America and a columnist for Business Week. He points out that mortgage rates remain low, prices are still at historic lows and the government is offering incentives for first-time home buyers. He also adds that the inventory of homes to buy is still large, but it is shrinking. According to the National Association of Realtors, the housing inventory peaked in November 2008 at an 11-month supply. At the end of May 2009, it had fallen to a 9.6-month supply. Roth says anyone who dallies will miss a good opportunity to buy a first home at a terrific price or go shopping for a move-up property that is a great buy. Source: Business Week.
Now here is the not so great news. Lenders have tightened underwriting requirements as the financial crisis has unfolded and because of the extremely harsh economic conditions, many who would love to purchase can’t do so at the present time. However, there is a solution to this predicament.
Rent to Own!
There are still plenty of sellers who cannot sell their homes in their environment and would entertain a serious offer that includes a one or two year period of renting before the home purchase is consummated. The advantage to sellers is obvious. If the home is presently vacant or they would like to move out to purchase another home, they can do so with the confidence of knowing that there will be cash flow coming from their property.
From the purchaser’s point of view, there are plenty of advantages in selecting this option as well. First, you can lock in today’s low prices even if you close one or two years from now when the market has turned around. The purchase price on a “rent to own” is typically set at the time of the sales contract, not when closing takes place. This gives the purchaser a big advantage from a timing perspective. It does not mean that negotiations will be easy and this is why you should be represented by a Realtor who is experienced in such complex transactions.
Second, the time period from sales contract to closing will give you time to get your finances in order. This may mean saving for a down payment. Note that most underwriting guidelines do not allow a credit for rental payments towards the down payment except for any portion of the rent that is “above market.” Many purchasers negotiate a seller credit towards closing costs as part of the contract, but every transaction will vary in this regard. Again this is a reason to be represented by experts within this process.
Putting your finances in order may also mean increasing your credit score during the rental period. Though you may not be given credit for your rent payments towards the cash necessary for closing,on-time rental payments will have a positive effect on your credit record. Make sure you keep a record of all rental payments, including copies of cancelled checks. Also, you may have to spend time clearing up mistakes on your credit record in addition to establishing good credit patterns.
A word of caution here. Just because you are given time to put your finances in order, you must still take the task extremely seriously. Set up a budget with a financial advisor and work with a credit score improvement specialist. If you fail to consummate the closing during the allowable time period, you are likely to forfeit your escrow deposit and the seller will be able to put the home back on the market.
The advantages are many and the opportunity is golden right now. There are many reasons to consider this option if you can’t purchase presently. We suggest you find an experienced loan officer and real estate agent team so you will understand the options and be able to put together a transaction that will put you in the right direction.