In real estate transactions, most buyers finance their purchase with mortgage financing. The buyer pays certain amount as a down-payment and the rest of the purchase amount is mortgage-financed to be paid over 15 to 30 years. Mortgage is typically financed through large banks such as Bank of America, Wells Fargo, JP Morgan Chase, etc.
Mortgage financing typically requires three things:
- High credit score
- A down payment (typically 5-20% of the home's purchase price)
- Income higher than "debt-to-income" ratio that banks typically look for
What if you have credit score that is lower than what mortgage banks require? What if you don't have quite enough down-payment saved?
Rent to Own - Alternative Financing
For some home buyers, rent to own may be a viable alternative to mortgage financing. Through Rent to Own, the buyer and seller are agreeing to the following arrangement:
- Buyer rents the home for a period of time, or "Term", agreed to between the buyer and seller
- During this Term, the buyer has an option to purchase the home at a predetermined price
- This purchase option can be exercised at any time during the Term
- The monthly payment paid by the buyer includes the rent and this purchase option premium
For details of how rent to own is structured, read the next articles on how rent to own works