Rent-to-Own Homes

Rent-to-Own Homes

How the Process Works: 

You want to buy a home? But don't qualify for a mortgage because your credit isn't the best, or cant come up with the money for a down payment. Some might consider a rent-to-own agreement, which can be an option for someone who wants but is not financially ready to become a homeowner. A rent-to-own agreement gives someone the chance to get their finances in order by improving their credit score and saving for a down payment while securing the house they would like to own.

What is rent-to-own?

Rent-to-own, also known as a lease-to-own agreement, is a legal contract between a buyer and a seller, the buyer agrees to rent the home for a set amount of time, typically 1 to 3 years before purchasing the home with a future closing date. That agreement is different from a lease option, in which you're given the choice to buy the home but is not under a contractual obligation. In this agreement, you will pay an option fee plus rent and rent premiums. An option fee is typically anywhere from 2% to 7% of the home's purchase price. It is non-refundable and at any point, during the lease term you qualify for a mortgage, you may use your option fee towards the down payment to purchase the home. Also, the option fee is not optional.  

The rent will go toward the seller's mortgage and the premium payments become a down payment when it's time to buy the home from the seller. Rent premium is a percentage of your monthly rent cost. Rent premiums are also known as rent credits because it is a portion of your rent that is credited back to you if you decide to purchase the home, the percent ranges from 15% to 25% of the rent price. You'll be paying more per month for rent than you typically would because you are receiving the credit towards the purchase. If you cannot or decide to not purchase the home, the seller gets to keep the rent premium you have paid throughout the leasing term.

I know this might be overwhelming, but just make sure you're signing a lease option and not a lease purchase. A lease option gives you the option to buy the home and the lease purchase obligates you to the buy the home. If you try not to purchase the home, the seller can take legal action.

Maintenance and other fees: 

Unlike traditional renting, you will be held accountable for all maintenance, repairs, and utilities on the home. The seller will usually pay the property taxes and insurance. The buyer will still need a renter's insurance policy to cover losses to personal property and provide liability coverage.

Purchase price:

Have a set price to eliminate the uncertainty of changing market prices. Having a fixed price allow many to organize their personal finances. Another benefit of a fixed price gives you the potential to gain money if the price agreed upon is lower than the actual fair market value of the home when the lease expires.

Research: 

There are potential risks when using a lease option. Learn as much as you can about the home, not having enough information is the biggest mistake you can make when entering an option to purchase contract. Retrieve any of the seller's public records and any available information about the property to make sure nothing suspicious or out of the ordinary occurred. Last but not least, evaluate your pros and cons.

Comparing your options:

The safest option is to just continue to save and rent. Most financial experts will recommend that option. Compare a rent- to- own opportunity with a more conventional home-buying process. It might not take as much of a down payment as you think to get an affordable mortgage payment. Explore all of your options before you commit to a decision.