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Rent to Own Mortgages

A Rent to Own Mortgage is a contract in which a potential homebuyer is able to live in the property they wish to purchase and pay rent for a period agreed upon by the tenant and landlord. A portion of the tenant’s rent goes towards their eventual down payment, which allows them to purchase the property at the end of the contracted period.

This program gives potential homebuyers new options in purchasing properties that they might not be immediately able to. This includes potential homebuyers who:

  • Suffer from bad credit
  • Cannot immediately afford a down payment
  • Have been rejected for a loan by the bank
  • Need time to save enough for a traditional down payment

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    Is a Rent to Own Mortgage better than a traditional Mortgage?

    A Rent to Own Mortgage is an attractive option for those who are unable to get a traditional mortgage, either because of bad credit or a lack of finances. However, potential homebuyers should be extremely cautious when entering any sort of agreement and make sure they have made the due considerations, such as:
    • More often than not, Rent to Own Mortgages ultimately favour landlords over tenants, meaning if there is a issue at the time of purchase, it is unlikely to be decided in the favour of the tenants
    • For those with poor credit considering this option, you should be sure that the time allotted for your agreement is enough for you to recover your credit rating and increase it to a level that you will be able to purchase the property by the end of the contracted period.
    • Similar considerations are for those who are struggling with their finances. If you enter into a Rent to Own Agreement and are unable to purchase the property by the end of the contracted period, you will lose all of the funds you had given along with your rent that would have gone towards the down payment.

    How is a Rent to Own Mortgage structured?

    A property owner will rent out their home to a potential home buyer with a specific contract that indicates the tenant’s intent to purchase the property at the end of the period, this can be anywhere between 3 to 5 years. For the tenant to still be viable to purchase the property at the end of the contract, they must adhere to any and all conditions agreed to in the Rent to Own agreement. The two parties will then decide on the rental amount and the amount which will go towards the down payment. Usually 75% of the monthly payments go towards rent, while 25% go towards the down payment.

    Some Rent to Own Mortgages are built with an ‘Option Consideration’. In this case, the potential homebuyer will pay between 2% to 5% of the home’s final asking price at the beginning of their rental agreement. If the tenant no longer wishes to purchase the property, they are able to walk away from the agreement at the end of their lease, forfeiting the original option funds.

    Example of How Rent to Own Mortgage Works

    The following is an example of how a Rent to Own Mortgage agreement can be structured: A home buyer enters a rent to own agreement for a 3 year contract. The renter will pay $1000 a month for rent and an additional $500 for the future down payment. Here is the breakdown of the transaction:

    • The price of the home is agreed upon at the beginning of the agreement at $450,000
    • The upfront deposit is $11,250 (2.5%)
    • The mortgage at the end of the agreement would be $438,750
    • The monthly rent is $1000
    • The monthly contribution to the down payment is $500
    • After 3 years the total from the monthly down payment advances would be $18,000
    • The remaining mortgage at the end of the rental period would then be $420,750

    How long do you have to be self-employed to get a Mortgage?

    To obtain a Self-Employed Mortgage, most financial institutions will ask that you provide personal tax notices of assessment for at least 2-3 years within your mortgage application. This proof of self employment for a significant period of time gives the borrower confidence in your ability to pay back your mortgage consistently throughout its term and gives you access to the same mortgage options as people who are not self employed. If you are not able to supply proof for a significant period of self-employment, you could still be eligible for a mortgage, provided you have a strong credit score, usually 700 and above. and are able to give a minimum of 10% as a down payment.

    How can I increase my chance of getting approved for a Self-Employed Mortgage?

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    Speak to a financial advisor

    A financial advisor will help you understand exactly what your current situation is in relation to your debts, current loans, personal and business expenses and total income. Understanding your finances and identifying and correcting any outstanding arrears is crucial to being approved for a loan.

    Maintain a strong credit score

    Even for those opting for a no document loan, a credit check is unavoidable and will prove to be the deciding factor if you get approved or not. Maintaining a strong credit score will signal to the borrower that you are a trustworthy lender.

    Make all documents available

    The more proof you bring of your business income and it’s profitability, the more likely you are to be approved for a loan. If a lender has enough documentation to reassure them that your business income can support a loan, you are that much more likely to be approved.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    You should be self employed for at least one year before considering a Self-Employed Mortgage, however waiting until you have 2-3 years of income to show will greatly increase your chances of getting approved. Canada Mortgage and Housing Corporation (CMHC) limits lenders to consider only the last three years of income.
    The basic documents you need to provide for consideration are: income statement for your business, credit scores for yourself and your business, Business contracts which show proof of consistent income, Tax receipts which prove payments and proof of ownership for your business.
    It is more difficult to get a Self-Employed Mortgage because there is a greater burden of proof from the lender to show they can maintain the payments necessary for a loan. Detailed income statements, along with a strong credit rating and a significant down payment are considered necessary for these loans.

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