The major downside to rent-to-own schemes is that participants don’t own any part of the home until they’ve made the final payment. That, and the fact they still need to apply for a home loan when the time comes for them to buy the property at the end of the rental agreement.

You put down a small deposit when buying a Rent to Own house (much less than what the bank would require, usually only 3-5% of the price of the house), this deposit comes off the purchase price of the house. You are given a period of time to purchase this house.

Instead of “giving away” your rent on a home you are temporarily staying in, your rent goes toward the purchase price of the home. You get to try before you buy. You can live in the home to make sure you love it before you buy it. You can improve your credit score and save more for a down payment.

Owner-occupied rental properties allow for banks to approve FHA loans with low down payments. These loans mean that, as a first time homebuyer, you can break into real estate rental investing quickly. Only after that can you move out and on and rent the whole property out.

Benefits can include low- or no-down-payment loans, grants or forgivable loans for closing costs and down payment assistance, as well as federal tax credits.

Higher total mortgage insurance costs. Borrowers pay a monthly FHA mortgage insurance premium (MIP) and upfront mortgage insurance premium (UFMIP) of 1.75% on every FHA loan, regardless of down payment. A 20% down payment eliminates the need for PMI on a conventional purchase loan.

A small, healthy amount of debt is good for a credit score if the debt is paid on time every month. Eliminating that debt by paying it off before the mortgage application could potentially negatively impact the borrower’s credit score, even if only temporarily.

Example. Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28% of gross income is $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)

Each lender has its own DTI limit, but most allow no more than 43%. Your monthly mortgage payment is required to fit within that ratio. If you have excessive credit card debt, you’ll limit how much you can spend on a house, no matter how much you make.

What monthly payments are included in debt-to-income?

• Monthly mortgage payments (or rent)
• Monthly expense for real estate taxes (if Escrowed)
• Monthly expense for home owner’s insurance (if Escrowed)
• Monthly car payments.
• Monthly student loan payments.
• Minimum monthly credit card payments.
• Monthly time share payments.

While car insurance is not included in the debt-to-income ratio, your lender will look at all your monthly living expenses to see if you can afford the added burden of a monthly mortgage payment. Thus, if you have a very expensive car that requires costly insurance, your lender may question you about this expense.

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Your current rent payment is not included in your debt-to-income ratio and does not directly impact the mortgage you qualify for. The debt-to-income ratio for a mortgage typically ranges from 43% to 50%, depending on the lender and the loan program.

How to lower your debt-to-income ratio

1. Increase the amount you pay monthly toward your debt. Extra payments can help lower your overall debt more quickly.
2. Avoid taking on more debt.
3. Postpone large purchases so you’re using less credit.
4. Recalculate your debt-to-income ratio monthly to see if you’re making progress.

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