Example 1

 

armada lettings

rent-to-own specialists

Example 1 - How rent-to-own works

John is a plumber living in Somerset and wants to buy a house but his credit score is poor, he is self-employed and he doesn't have the 10% deposit he needs to get a mortgage. Under a normal house purchase John would not be in a position to buy a house. However, he finds a seller who is happy to let him rent their house now and buy it sometime down the road.

 

The house is a 3 bedroom semi in Somerset

John agrees a price of £150,000 for the house

Normal rental price is £500 a month

John needs a 10% (£15,000) deposit to get a mortgage

A rent-to-own agreement for John could look like this:

  • A rent-to-own term of 3 years is agreed
  • John pays £750 a month (£500 rent + £250 rent credit).
  • Over a term of 3 years his total rent credit is £9,000 (36 months x £250)
  • Getting started money is £6,000 (paid up-front) - this will go towards John's

deposit when he buys the house

  • Adding together the 'getting started money' and 'total rent credit' means that

John has accumulated £15,000 towards buying the house.

After 3 years John has now got the 10% deposit needed to get a mortgage.

He has also had time to get together 3 years of trading accounts to show the

mortgage company and to improve his credit rating.

 

But just suppose:

Suppose in this example that the cottage that John wants to buy could be greatly improved.

John could increase the value of the house from £150,000 to let's say £180,000 by spending £5,000 on improvements and decoration.

This means that when John applies for a mortgage he will be asking for a mortgage of £135,000 against a property now worth £180,000, which is 75% of the value. John will own 25% of the total value of the house (£45,000).

 

 

 

 

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