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Who Holds the Mortgage in Rent-to-Own Homes?

by Tim Plaehn, studioD

If you are attempting to buy a home using a rent-to-own contract, you have no specific type of financing on the home during the rental period. So from your point of view, no mortgage exists to hold. The seller of the home may have a mortgage on the house. The current owner's home loan typically has little to do with your rent-to-own contract.

Purchase Option

A rent-to-own contract gives you a purchase option on a home combined with a rental or lease contract. Initially, you are renting the home and a portion of each monthly rent payment is credited toward the purchase price. Rent-to-own allows you to build equity from the rental credits and also yo grow equity if the value of the home increases above the purchase price listed in the contract. However, until you choose to exercise the purchase option provided by the contract, you are just renting the home.

Exercising The Option

To turn a rent-to-own into a home you own, you must exercise the purchase option and pay the price of the home stated in the agreement. The initial deposit you paid, the accumulated rent credits and any additional cash you put into the purchase will make up your down payment. To cover the rest of the purchase cost, you must apply for and qualify for a new mortgage loan. After you are approved for a mortgage in your name, the lender will pay the amount of the mortgage to the seller of the home and you will become the official owner of the home.

Status of Seller

The person to whom you pay the rent checks will be the seller of the home when you exercise the rent-to-own purchase option. Until you actually buy the home, this person remains as the owner. She may or may not have a mortgage on the home. If there is a mortgage, the current owner -- not you -- must keep up with the loan payments. When you obtain your own financing for the home, the proceeds from your mortgage will go to pay off the loan the current owner is carrying on the house.

Outstanding Loan Balance Information

Before you commit to a rent-to-own contract on a specific home, you may want to find out how much the seller owes on the home, if there is an outstanding mortgage. If the current homeowner owes a large amount relative to the home's value -- such as the rent-to-own purchase price -- the seller has little or no equity at stake if you exercise the option to buy the home. The worst case would be if the owner fails to make the mortgage payments while you are making rent payments, and the home is foreclosed by the existing lender. You could lose whatever rent credits or deposits you gave to the home's owner.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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