Rent-to-own programs are making a comeback as consumers with less-than-perfect credit try to qualify for mortgages to get on a path to homeownership. Wall Street firms are increasingly offering the option to some consumers, allowing them to rent the home first with the option to buy it later.
Rent-to-own programs were popular during the 1990s but then faded when lenders loosened underwriting standards and allowed more borrowers to qualify for a mortgage. But now, with credit tightening in recent years, rent-to-own programs are making a comeback, The Wall Street Journal reports.
Some investors find it a win-win. They can get consumers to pay a higher rent in the beginning and usually a higher purchase price the longer a tenant waits to move from renting to owning.
Officials at Home Partners of America, among one of the fastest growing rent-to-own companies, say they saw an untapped market helping people shut out of the housing market.
“What really frustrates me personally is that a lot of people I grew up with, extended family members, would have trouble getting access to mortgage credit today,” says company founder William Young. The company, which operates in 30 metro areas (six in Florida) within 15 states, spent $100 million to buy about 320 homes in June – a significant increase from $15 million for 66 homes a year ago.
In Home Partners’ program, a consumer works with a real estate agent to select one of the company’s approved communities (with homes priced between $100,000 to about $725,000). The company teamed up with several real estate franchises, such as Realogy Holdings Corp. and Berkshire Hathaway Home Services.
Home Partners then purchases the home and leases it to the consumer, giving him or her the right to purchase the home from Home Partners within five years. During the rental phase, consumers work on repairing their credit and saving for a downpayment.
The longer a resident rents, however, the more they’ll pay in the end to purchase the house. However, consumers can also opt out of purchasing the home if it becomes too expensive for them.