Rent-to-buy is a marketing gimmick

Keychain shaped like a house with 2 keys

We've been unpleasantly surprised by the number of "Rent to Own" signs popping up.

Why? Because it's mostly a marketing gimmick to lease houses property owners can't sell.

There's little benefit to the renter -- even a renter with bad credit or too much debt to qualify for a mortgage. These deals rarely result in a purchase and you could actually lose money.

We're seeing more of these offers because houses aren't selling as quickly as they have over the past two years. There's a growing backlog of unsold homes and prices are stagnant or falling in most parts of the country.

That has put some owners -- particularly real estate investors who buy houses hoping to "flip" or quickly resell them at a substantial profit -- in a bind. Since they typically buy houses that need a lot of work and are among the least attractive on the market, they are the hardest to get rid of when sales slow down.

So now they're trying to rent them.

By offering to credit part of each month's rent toward the purchase price of the home -- the key element of any "Rent to Own" deal -- they are trying to make it sound like you are getting more for your money and taking a meaningful step toward owning your own home.

Regrettably, that's rarely the case.

Twenty years ago, when lenders demanded substantial down payments to qualify for a mortgage, "Rent to Own" made a little sense.

Landlords would credit part of each month's rent towards the purchase of the house. The idea was to rent until you had accumulated enough for the down payment -- usually 10% of the purchase price or more.

The need for this type of financing changed a few years ago when lenders, anxious to profit from the housing boom, began to routinely make home loans with little or nothing down. But due to the current problems with foreclosures and defaults on loans featuring 100% financing, this type of mortgage is no longer available to people with credit scores below 620.

There are, however, low down payment alternatives.

Government-backed loans, such as those insured by the Federal Housing Administration, or FHA, require only 3% down -- and you can borrow the down payment from friends or family or obtain funds from public or private agencies.

The FHA was created to help first-time buyers with modest incomes or people who would be unable to obtain conventional mortgage financing. The FHA is more lenient when it comes to debt-to-income ratios and blotches on your credit history -- even bankruptcy.

And the Department of Veterans Affairs, or VA, has been offering no-down loans to qualified service personnel since the end of World War II.

You can also ask the seller to pay your closing costs. The longer a house has been on the market, the more likely a homeowner will be willing to do that to get it sold. Don't be shy about asking, especially in cities where sales have slowed the most. This is as negotiable as the price of the home or any other terms.

Despite that, there are still lots of reasons you may not be able to buy a house right now.

A recent bankruptcy, low credit score or too much debt might make it difficult for you to qualify for a mortgage, at least not without paying exorbitant interest rates that make the monthly payments unaffordable.

"Rent to Own" deals are often pitched as a way to help with that but they offer little assistance.

They often require you to pay an option deposit. It is non-refundable, but it is usually credited toward your down payment. In addition, a dollar amount or a percentage of your rent is set aside each month to go toward your down payment. If, when your option to buy comes up, you cannot or do not wish to purchase the home, you lose that money.

It is not unheard of for real estate investors to use a purchase option to justify higher rents and lock you into a purchase price that's higher than what comparable houses are selling for.

Unfortunately, some renters don't realize they can't afford to buy until it comes time to exercise the option.

You might have been comfortable paying $1,000 a month in rent. But that $1,000 probably won't cover a house payment plus insurance, property taxes and private mortgage insurance, which is required if you don't have 20% down. And then there's always maintenance, which was likely the responsibility of your landlord, but now comes down to you.

So if you've got to rent, find the best price on the best home you can.

Don't let "Rent to Buy" enter into the decision.

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