#5 Real Estate Trend 2023: An Incessant Boom in Extreme and Risky Buying Alternatives
You want to buy a house for your family. You find one, figure out it’s affordable, and move forward with the loan application process. However, you’re turned down for the bank loan because of your poor credit history.
That’s the story of many potential homebuyers.
Unfortunately, since they aren’t able to use traditional mortgaging options for their real estate needs, they are turning towards alternative financing arrangements, such as rent-to-own and down payment loans.
In this blog, let’s understand what rent-to-own and down-payment loans mean and what their advantages and disadvantages are.
A Sneak Peak Into Risky Real Estate Buying Options
Most homebuyers need a mortgage to finance the purchase of a new house. However, the preliminary for you to get a loan is you have a good credit score. It will define your creditworthiness. Moreover, you also need some cash for a down payment. If you can’t afford these two, the traditional mortgage option is tricky for you.
Luckily (or not), there’s lately surfacing another alternative to home buying options. It’s called a Rent-to-Own agreement. If you need to buy a home but don’t have the resources to do it yet, you can explore this option.
Rent-to-Own agreements are deals in which you agree to rent a property for a while with the option of buying it later before the lease runs out. It’s a legal contract between a buyer and a seller with a future closing date. It is usually one to three years after the contract is signed.
How Does Rent-to-Own Work?
Here is a breakdown of how rent-to-own works –
- A potential buyer looks around for financing options to buy a home but realizes they can’t afford it now. However, they are optimistic they will be able to secure the mortgage in the future.
- With that hope, they strike a deal with the house owner. It includes moving into the house as a tenant and paying monthly rent, with the option to purchase the house in the future.
- The potential buyer and the house owner enter into a rental agreement. The former pay upfront cash for the option to buy the house at a future date. The cost can be anywhere between 2% and 7% or vary.
- The tenant and house owner can get into specific terms and conditions like –
- The monthly rental rate
- The term of the rental agreement
- Credits from the rent paid towards the purchase of the home
- Cost of the option to buy
- The expiration date of the option
- Property purchase price
- Cost of ending the rental agreement early
Pros of Rent-to-Own
- Allows you to save for a down payment
- Offers time to build credit
- Your money is not going only towards rent but helping you build your future home.
- You get the stability to live in the home you will own.
Cons of Rent-to-Own
- If you don’t follow through with the contract of buying the home later, you risk losing cash. It may also have legal consequences.
- Your rental premiums cost more than market-rate rent.
- No room for skipped payments.
- Even if the house price falls, you’d still need to buy it for the amount written in the contract.
Down Payment Loans
Another frisky real estate trend that’s been making rounds lately is taking down payment loans.
Most homeowners will successfully get a home loan to finance their purchase. The ideal process is to pay 3% to 20% of the home’s purchase price as the down payment.
However, what would you do if you don’t have sufficient funds for the down payment? While most people will say not to go through with the loan, this new real estate trend offers a new but risky alternative. It’s taking out a personal loan to fund a down payment. In essence, it’s the same as buying a home with a 0% down payment. Moreover, you end up borrowing the entire cost of the house but from two different companies at two different interest rates.
Pros of Down Payment Loans
- You get access to homeownership even with insufficient funds.
- You need to save a lesser amount of money for a down payment. It helps you purchase a home sooner.
- You don’t need to liquidate your assets to afford a down payment.
Cons of Down Payment Loans
- Down payment loans have higher interest rates than traditional loans. So while it may look like you’re saving the money, you’ll end up paying more in the long run.
- Borrowing a down payment loan can impact your credit score and your ability to take on other loans in the future.
- You’ll have less equity in your home in the beginning.
- Contributing more money towards interest and loan fees will keep you from reaching other financial goals.
Risky real estate trends are rarely a good idea. Falling into these pitfalls can cost you a financial burden. So if you can’t afford a home at the moment, don’t feel pressured to do so through risky alternatives.
Are you looking forward to getting more hot real estate market trends and insights in 2023? If yes, keep following ZipperAgent’s blog space.