Q. I can’t really afford a house and my credit score is on the low side, making it more difficult to qualify for a loan. I’m tired of throwing my money away on rent; should I look for a rent-to-own property?
A. I understand and applaud the dream of home ownership that is alive in you. This may not be what you want to hear, but it will serve you well. Let me disclose that I am fiscally conservative, and my belief is that a house, while being a sound financial investment, is a commodity like anything else, and is subject to the whims of the market.
Don’t buy a house if you cannot afford one. The best rule of thumb for what you can afford is as follows: You should have enough for the down payment of at least 10% and preferably 20%, closing costs, and eight months of living expenses.
Here is why. If you bought a property in 2005 with 3.5% down (the minimum) as a rent to own, and you took title after a year of rental, you now owned a home in a declining market. Over the next four years, depending on the area you purchased in, values declined from 28 to 48 percent (In your neighborhood, Mar Vista, values have declined as much as 38%.) You not only have no equity in the home, you cannot sell it for anywhere near the price you purchased for. The odds of you getting a HAMP modification are slim, because, in your own words, you cannot afford a home, and you have no equity to assure the lender of repayment. So now you will lose your home, suffer serious damage to your credit score, or be left paying for a mortgage that is higher than the value of your home. You are farther away from home ownership than ever.
My best advice to you is, wait to buy a home, and become an investor instead. Rent for now, get pre-approved for the amount of loan you can afford, and purchase income property, which you will rent out to others. You want an investment with a positive cash flow. There are properties out there like that. You may need to get a group of like minded investors (friends) to put together the down payment. Watch that property go up in value, and your equity along with it. Then cash out and move up, or refinance, hold, and buy another. This way, you will be participating in the American Dream, but not putting all your eggs in one basket, and becoming house-poor.