I frequently hear questions like this: “We just short-sold our home and we have to move. We want to rent to own, or get a lease option to purchase.”
My answer is, no, you really do not want to do this and following are some of the reasons why.
In most cases, the earliest one will be eligible for a new mortgage following the conclusion of a short sale is three years, and it may be as much as four. Some think that FHA will begin to lighten the regulations on purchasing after short sale, but to date, this has not happened. Conventional lenders aren’t allowed to fund a new mortgage for a minimum of five years (up from four last year) following a short sale. I will continue to discuss this topic periodically until the housing finance market opens up to more sensible underwriting standards.
In spite of well intentioned information to the contrary, a short sale, by any other name, is still one’s failure to complete the terms of a contract.
Be very cautious about ‘Lease to Purchase’ or ‘Rent to Own’ offers. Many are frauds, and some, while not outright frauds, may be based on false premises. Check the fraud alerts section of your State Attorney General’s office and do your due diligence via the Better Business Bureau as well as the Bad Business Bureau. Do not sign a lease/purchase or rent to own contract without having your own attorney bless the transaction. Paying a legal fee of a few hundred dollars on the front end can save you thousands on the back end – as well as providing a certain measure of assurance and a great deal of savings on your emotional investment.
Cases of inadvertent or initially unintentional fraud are not uncommon. By way of explaining, a client came to me after not one, but two back-to-back lease to own frauds. Emotionally, she felt she had to own a property to assure herself she was a truly worthy person. In both cases, she entered contracts to purchase at a later date, paid her deposits and advance lease payments. In both cases, the landlord or pseudo-seller defaulted on their mortgage payments and in both cases the client was evicted following the foreclosures on her former landlords. The moral of this story is to perform your due diligence. You may wish to hire your trusted local Realtor to look into the public records of the particular property you are thinking of leasing.
Particularly following a short sale or foreclosure, aside from being on a short term hiatus from obtaining your own home loan, it is perfectly fine to be a renter. As stated by one of the most successful Realtors in the USA, Larry Nordine a/k/a The Big Kahuna, “There is a lot to be said for renting.” Finally, keep in mind what Vincent Daniel says: “A home without equity is just a rental with debt.”
As always do not hesitate to write back with comments or questions. I read everything that comes back, even though I don’t always get a chance to respond as quickly as I would like.
Financially Speaking – James Spray, CCMB, CNE – June 25, 2011