A New Approach To Affordable Housing

Borrowing, Home Purchase Loan

Help the Renters, Too

For years, cities have struggled to help lower-income Americans find affordable housing. Many housing assistance programs approach this problem through making home mortgages more affordable. However, a new test program in Montana addresses an underserved area of the housing market – affordable rental homes – by making loans to help people move in.

To complement their efforts on homeownership, the Great Falls, MT, chapter of NeighborWorks America is trying out a “Ready to Rent” program to address low-income renters. This program targets those who need a bit more financial assistance and education to get them out of poor rental situations.

Landlords Taking Advantage

The target consumers have enough income to afford a better rental home but can’t save up the necessary upfront money (security deposit and initial month’s rent). In the meantime, they may settle for shady informal rental arrangements.

Unscrupulous landlords may lead these low-income renters to believe they are in a rent-to-own agreement without fully disclosing the details or the risks involved (such as the renter being responsible for his or her own home insurance).With an incomplete understanding, these renters are more likely to make mistakes that could cause their eviction without any return on the money that was already spent.

The proposed approach offers a safer path to affordable rental housing – assuming that it is combined with financial discipline.

Upfront Money and Financial Education

The Ready to Rent program offers a small loan to potential renters, covering upfront costs on their upgrade to a more stable rental home arrangement. Loans can be for amounts up to $1,000 and terms of up to three years. With a reasonable 5% APR and no penalties for paying loans off early, these loans carry better terms than the renters are likely to find elsewhere.

Borrowers can receive an added bonus simply by making their payments on time every month. Rental payment histories are not usually reported to the credit bureaus, and therefore a good rental history doesn’t factor into your credit score. In contrast, payments on the Ready to Rent program are reported to the credit bureaus, allowing you to build a credit history or repair a bad one.

Conversely, you can damage a credit history by failing to make payments. That’s why the loans are contingent on a corresponding counseling program.

Program participants learn the important concepts necessary to be a good tenant. Financial training includes proper budgeting techniques and spending control. Potential renters learn how to read and understand a credit report, how to take actions to correct credit-reporting errors, and how credit scores can be improved. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. Home maintenance expectations are also covered, including how to keep the home sufficiently clean – a common concern of landlords.

In short, the pilot program will provide necessary rental funds and the education to use them wisely.

Discipline is Required

Like any innovative program, Ready to Rent carries some inherent risk.

While the Ready to Rent program includes a fairly affordable loan, it’s still a loan that must be paid off regularly – adding to the burden of potential renters that are already on the financial edge. It’s important to find the right combination of loan terms and rental home to make the program work.

Program participants must be able to budget properly to incorporate the monthly loan payment without running into other financial hardships – like racking up high-interest credit card debt to maintain high spending levels. They must also understand the monthly payment level that they can afford, and not be tempted to find a rental house that is too expensive to sustain.

That’s why comprehensive homeownership counseling is essential to making the program work. Otherwise, less-sophisticated renters could end up trading one unstable rental situation for another, with even greater potential for losses.

The Takeaway

The NeighborWorks Ready to Rent program in Great Falls is an innovative approach to helping low-income residents find stable and affordable rental housing while developing good financial habits, including building a credit profile.

Unfortunately, Ready to Rent Is not available everywhere. When support programs don’t exist, renters must take the initiative to learn proper saving habits and how to distinguish between good and bad home rental situations – especially with today’s limited housing supply and seller’s market.

If you are ready to enter the rental market or upgrade your current situation, start by making a realistic list of your needs and deal-breakers in a home. You’ll probably have to settle for some things you don’t like, so prioritize wisely. Then scour the local ads regularly for homes that fit your minimum criteria. If you have a smartphone, download apps from Trulia, Zillow, and other sources that can send notifications when a candidate rental home becomes available.

In the meantime, review your budget for possible spending cuts that can be diverted toward the upfront money that you’ll need for a suitable rental. Eventually, you’ll have enough money to secure a rental home – but if you can’t wait, check with local real estate groups and relief agencies to see if a Ready to Rent program or something similar exists in your area.

MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

Photo ©iStockphoto.com/PURPLEANVIL

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