7/25/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Is it smart to rent-to-own a house?"

Dear Dave,

What is your opinion on rent-to-own house deals? Are they a good idea? How much of your monthly rent payment goes toward the down payment on the house?

Steven in Pittsburgh, PA



Dear Steven,

Those are seldom a good deal for the buyer, but are a great deal for the landlord. How much of the rent goes toward the actual purchase varies and it’s really up to you and the landlord to work out when the deal is made. The exception is with FHA loans. They have a rule that you can only apply toward the down payment however much you pay in rent in excess of the average rent in that market. For example, say the average rent for a house in your area similar to the one you intend to buy is $700. The landlord is willing to rent the house for $700 and count $400 of that rent toward your down payment. That’s all well and good, but if you’re getting an FHA loan for that house, they won’t let you count any of that rent toward your down payment. You’ll still have to have a cash down payment for the FHA loan. Now, if you pay the landlord $800 a month in that situation, FHA will let you count $100 a month of your rent toward the down payment.

Usually, what happens with rent-to-own situations is people pay an up-charge on rent and still don’t ever exercise their option to purchase the property. So, most of the time these are not good deals for the buyer.

-Dave 

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