Buying a home is a major milestone in many people’s lives, but not everyone can afford that luxury. Fortunately, there is an alternative for homebuyers who have some financial constraints that are currently preventing them from buying a home.
For some homebuyers, it can be a smart decision to rent a home with the option to purchase it in the future. This process is known as a rent-to-own agreement.
Since rent-to-own agreements are not the most common method for purchasing a home, many homebuyers are not even aware that it is an option.
Additionally, this process is a bit more complicated than simply renting and buyers will need to take additional steps to protect their interests.
Learn more about rent-to-own is a wise choice if you are looking to purchase a new home.
What is rent-to-own?
Rent-to-own is an agreement that allows people to buy the homes that they are currently renting once they reach the end of their lease.
Typically, a portion of the rent they paid during the lease agreement is used as a credit towards their mortgage down payment.
It is important to keep in mind that the specific details of the contract can differ depending on what the buyer and seller agree on.
The time period for renting in this type of agreement usually ranges from one to five years. Buyers can knock off a sizable portion of their purchase price during this time.
However, the actual purchase price of the house that is being rented can vary depending on the terms of the contract.
For example, some contracts will state that the purchase price will remain the same as when the contract was first signed.
Other contracts will base the purchase price of the home on the market value of the house at the end of the lease.
Additionally, some contracts will choose to have the purchase price of the home go up every year but will allow renters to buy the house during any year of the lease.
How does rent-to-own work?
There are two general types of rent-to-own agreements that will dictate your options at the end of your lease. You will either sign a lease-option agreement or a lease-purchase agreement.
It is vital that you know which type of rent-to-own agreement you are getting into before you sign any contracts.
When signing a lease-option agreement, you will usually have to make a nonrefundable payment at the start of your lease term.
This payment is sometimes referred to as option money, and it will be determined based on a small percentage of the home’s purchase price.
If you are to purchase the home, that option money will be counted towards the purchase price of your home. However, if you decide against purchasing the house, your money will not be refunded.
The other type is a lease-purchase agreement, in which you will be obligated to purchase the home at the end of the lease.
One of the main benefits of this type of agreement is that it does not involve any option money when you initially sign the deal.
In a lease-purchase agreement, the purchase price and date of purchase will usually be established during the signing of the contract.
Before signing a rent-to-own agreement, be sure to:
- Choose the right terms (usually a lease-option agreement).
- Research the contract.
- Research the home and check for any maintenance or repair issues.
- Research the seller’s credit report and other financial history.
Learn About the Benefits of Rent-to-Own Homes
Rent-to-own agreements can make purchasing a home much simpler and more convenient for people who currently do not have the money for the down payment on a mortgage.
These types of agreements can slow down the process and allow for the homebuyer to have a place to live while they get their finances in order for the purchase.
In a rent-to-own deal, the buyer will have an established timetable that they can use to raise their credit before they need to purchase the home.
At the end of their lease, they may be able to secure more favorable terms on their mortgage with their improved credit.
For individuals who have been struggling in terms of employment or with illnesses will have time to recover and get back on their feet without stressing about their housing situation.
Another notable benefit of rent-to-own agreements is that there is a lot of potential for negotiating the contract to your liking.
For example, you can negotiate how the purchase price is determined, the cost of monthly rent payments and who is responsible for repairs and maintenance in the home.
If the negotiations go your way, the terms of the contract can be even more favorable for you.
Drawbacks of Rent-to-Own Homes
Although rent-to-own homes can be a good option for some buyers, it may not be the best fit for everybody.
It is important for homebuyers to be aware of the laws in their state regarding rent-to-own homes, specifically what happens if they were to miss a payment.
In some contracts, tenants who miss a payment may lose all of the other payments they previously made.
Unfortunately, there are not too many consumer protections against this type of issue, so it is essential that homeowners are aware of all of the stipulations of a contract before signing.
Some of these rent-to-own contracts pose a high risk of tenants losing all of their money allocated towards the home.
In these cases, the tenant would lose all of the equity they built on the house for missing a payment.
Another drawback of rent-to-own homes is that you are often stuck with a specific purchase price. If the housing value in the area begins to fall, you will be stuck with the purchase price you initially agreed upon.
While you can potentially save some money if housing prices rise, this inherent risk is a disadvantage of rent-to-own homes.
Who is the ideal candidate for Rent-to-Own Programs?
The ideal candidate to participate is a rent-to-own program is someone who wants to be a homeowner but is not quite financially prepared for the purchase.
During the leasing period, homebuyers in rent-to-own agreements can improve their credit score and save up money for their down payment. They will also be able to lock down a house of their choice while they get their finances together.