In one example of a lease option agreement offered by the University of Utah, the tenant/buyer could breach the agreement merely by using “offensive language” around nearby residents. Imagine trying to sort out in court what constitutes “offensive” language if you get kicked out and your rent-to-own deal falls apart!

Make sure the term is long enough that you’ll be in a position to finance the property with a regular lender, and that you’ll be able to afford the future mortgage payments.

Some unscrupulous sellers actually want you to complete the purchase, according to a study by the nonprofit National Consumer Law Center.

For example, some include clauses allowing sellers to cancel the deal and keep all of your option money and rental credit for being late with

You may be obligated in your agreement to cover maintenance and repairs that normally would be the landlord’s responsibility. Again, if you cannot keep up this maintenance, you could end up forfeiting your money to the seller.

One study found that only about 20% of rent-to-own home contracts actually resulted in a completed sale. Otherwise, the would-be homeowners moved out, losing their money, or ended up in foreclosure with mortgages they could not afford or homes that were worth less than they paid.

Potential buyers should also be wary of scams. Before negotiating a rent-to-own deal, find out who owns the home through a title search or through tax records at the local courthouse.

If the person you enter a lease-option agreement with doesn’t own the property, you could be dealing with a scam artist who wants to steal your upfront money.

And make sure you see the condition of the home for yourself before agreeing to maintenance — especially if your purchase option depends on maintaining the home.

Be sure to retain a lawyer

Because lease options or owner-financed contracts don’t typically involve mortgage lenders, and because they can feel less formal than a traditional sale, it can be tempting to forgo legal representation.

Don’t. The rent-to-own process creates a lot more risk to the buyer than traditional transactions. You’ll need adequate representation.

Hire a real estate attorney to work on your behalf. The seller is likely to have someone clever doing the same thing, and ignorance can be very costly to you — both upfront and later, at the end of the lease agreement.

Your attorney can review your agreement with the seller and identify clauses that could unfairly cancel your option or your right to purchase the home.

An attorney can also look at county records to make sure the home you’re planning to purchase is not in foreclosure, saddled with liens, or owned by somebody other than the seller.

You should also have your lawyer record your lease option or purchase with your County Recorder.

This will prevent the seller from transferring the property while it’s under contract to you. It will also prevent the seller from acquiring additional mortgages against the property without your knowledge.

There are bank statement loans for them. These mortgage programs vary by lender, but in general, the applicant must submit 24 months of bank statements. The lender averages the deposits to determine the income available for mortgage repayment.

Interest rates for these programs are a little higher. But in exchange, much of the risk you’d assume by purchasing with a lease option or owner-financed contract goes away. The lender takes it on instead, and that’s worth a lot.

Mortgages for people with low credit

If your credit isn’t good enough for a mortgage today, be careful. By taking on a risky or unaffordable lease or mortgage payment, you’ll be going from bad to worse. Seek the advice of a non-profit credit counselor before jumping into more debt.

If you have a low credit score, but not necessarily bad credit, you may still be able to get mortgage approval.

Try a government-backed mortgage like FHA. You have a decent shot at approval if you have paid your obligations as agreed for at least the last 12 months. With FHA, your FICO can be as low as 500 with 10% down. Or, more commonly, you could get approved with a credit score starting at 580 and just 3.5% down.

If your credit is shot, but your income and down payment are high, non-prime lenders could potentially finance you. You can have a FICO score as low as 560 for many of these and you might have discharged a bankruptcy yesterday.

These might be great choices if you can improve your position and refinance in a year or two. Or if you plan to flip the house and don’t care if the interest rate is high.

Mortgages with low and no down payment

No one should be barred from homeownership if making a down payment is their only obstacle. A variety of loan programs and options can help.

Note that many options have income limits, but those limits are probably higher than you expect.

Here is a very quick rundown of options:

• VA home loans — Allow 0% down payment for eligible veterans and service members
• USDA loans — Allow 0% down payment for low-to-moderate income buyers in qualified rural areas
• FHA loans — Allow 3.5% down payment and credit scores as low as 580
• Conventional 97 mortgage — Fannie Mae and Freddie Mac allow as little as 3% down if your credit score is at least 620
• Fannie Mae HomeReady mortgage — This loan program allows 3% down, and the home buyer can use income from other household members to help them qualify for the loan
• Down payment assistance (DPA) — State and local governments, as well as non-profits, offer grants and low-interest loans to help home buyers cover the down payment and closing costs. Research DPA programs in your area or ask your real estate agent or loan officer for help
• Seller concessions — The home seller is allowed to cover part or all of your upfront mortgage costs, if they agree to it
• Co-signers — If you have a friend or family member with excellent credit and/or income willing to co-sign your mortgage, you could qualify more easily. But use caution, because this person is putting themselves at risk of losing their credit score and savings if you can’t make your mortgage payments

Thanks to the wide variety of loan options and assistance programs, upfront funds are a much lower barrier to homeownership than they used to be. Often, it’s just a question of researching your options and finding the right strategy to buy your new home. 

What are today’s mortgage rates?

Average mortgage rates are still near record lows, which means potential buyers could purchase homes with lower financing costs.

But your actual rate will also depend on your credit score, debt-to-income ratio, and the property you’d like to buy. Even if you think rent-to-own is your best bet, at least consider your chances of getting an actual mortgage loan.

It makes sense to sit down with a good loan professional before resorting to riskier types of rent-to-own options.

If you choose a rent-to-own or lease option, treat it like a lender would. Protect yourself with legal advice, appraisals, inspections and make sure your transaction is publicly recorded.

Verify your new rate (Jan 15th, 2021)