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:
deposit when he buys the house
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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