Rent to Own vs. Traditional Mortgages

Establishing and Repairing Credit

It’s no secret that most people seek out Rent to Own home options over traditional mortgages because of credit issues: either their credit is fair or poor or simply just established. Depending on the housing market, banks may be very strict with their lending. So what are the major differences?

No Banks Involved in purchasing a Rent to Own homes 

Rent to Own homes are arranged without any bank involvement. Many people may use a lawyer to protect themselves or a realtor to have good counsel. But, there are no banks or bank loans involved. Rent to Own homes are often referred to as Owner Financed homes, because the “lending” falls on the owner/seller. Now this is where it gets a little tricky.

The Long Haul

RTO transactions are usually 24-36 month agreements where the party interested in purchasing the home essentially “rents” it from the owner. Their “rent” payments go towards the down payment of the house. Once the agreed upon time has passed, the renter can then choose to purchase the house. They typically complete the purchase by using the down payment built from those “rent” payments and a bank-backed loan, after spending time fixing or establishing their credit.

You’re in a position where you are building up or re-building your credit, and you’re interested in taking out a home loan. You may be asking, “What does my credit score need to be before I can qualify for a mortgage?” There’s a general range that puts you in the home loan waters for smooth sailing, and a little give in a lower range for rougher waves.

In general, it is safe to say that a credit score of at least 670 is necessary to take out a traditional mortgage. Some say that a lower score (high 500s to low 600s) can qualify you for certain programs. These programs are typically a little trickier to navigate. For example, although you might qualify for an FHA loan with a lower score, and this type of loan requires less of a down payment, you might be mandated to take out additional insurance (PMI). The weight of carrying this type of home loan can be heavy.

So, it’s safe to say, in order to avoid extra stress, you should have a credit score of 670 or above before you apply for your first mortgage loan. After this, make your payments on time so that your score continues to increase. A higher credit score always equals a lower interest rate when it comes to financing.