If you already own your home, and are unable to secure bank or private financing to remain in your home, a Rent-to-Own Refinance may be an option. Below are some frequent questions.
1: How much equity is required to potentially quality for a rent-to-own refinance?
Answer: The required equity varies on each file. In the most ideal situation, there is at between 5% to 10% equity remaining after paying off current mortgage(s), any property/municipal tax arrears, determined unsecured debts, and applicable fees and closing costs of between 3% – 4% of the purchase price.
Example: On a $400,000 purchase, the equity after paying all required debts is $32,000 – $52,000. This amount is set aside towards the future down payment when the home is purchased back.
2: What are the typical fees associated with the rent-to-own process?
Answer: Expected costs consist of the following (Estimates):
- Home Inspection – $500.00
- Appraisal – $500.00
- Independent Legal Advice/Representation – $1500
- Combined Brokerage Referral and Consultant Fees – 3% – 4% of purchase price
3: Who is responsible for purchasing the property at the outset of the program?
Answer: An investor partner purchases the property on the client’s behalf. Prior to finalization of the purchase, a Lease Agreement and a Purchase and Sale Agreement are required to determine the terms of the lease and the agreed end purchase price to ensure all parties are on the same page.
4: Who is responsible for the property maintenance for the term?
Answer: You, the tenant is responsible for all maintenance and utility bills, including water.
5: What are the options if I am unable to complete the purchase at the end of the lease term?
Answer: If payments have been missed or credit management guidelines have not been followed, you risk 100% loss of the initial down payment and accumulated credits. However, in the occurrence of an unexpected life event, exceptions may apply.
6: Are property taxes and insurance charges incorporated into the monthly payment?
Answer: Yes, property taxes and insurance are typically included within the monthly payment.
7: Can I qualify with poor credit?
Answer: Yes. Programs are available that aims to assist with credit improvement.
8: How is the future purchase price of the home determined?
Answer: A fair yearly appreciation is applied each year to determine predicted future value. This is disclosed in advance prior to finalizing an agreement.
9: What is the typical period for finalizing an application?
Answer: Allow for between 4 – 6 weeks for the finalization once an investor has committed.
10. How is the payment determined?
Answer: A few factors determine the payment such as property value, property tax amount, insurances, and buy-back term. For ease of reference, a simplified payment be based on a lease factor of 0.0075% – 0.0085% with 10% – 15% of the payment being applied to the future down payment. Example Below:
Property Value of $400,000 x .008%
= $3000/month payment ($3200 x 15% = $480/month is added to initial remaining equity). If the initial equity was $40,000; $5760 is being added to this amount every year.
If the term is 3 years, the total down payment to purchase the home back would be $57,280.00.
11. How is the future purchase price determined.
Answer: Future price is determined on a variety of factors that are determined once a file is fully reviewed and is based on a yearly appreciation value.
Example:
Assuming a house is valued at $400,000 and it purchased at the same value with a 2% appreciation; the future buyback value can potentially be as follows:
Year 2 – $408,028 ($400,000 +2% + 2%)
Year 3 – $416,160 (408,028 + 2%)
Year 4 – $ 424,483.20 ($416,160 + 2%)