Buying a home is many renters’ dream, but getting there requires scrimping and saving on squirreling away a down payment. It also requires meticulous bill-paying and careful credit management to keep a score high enough to qualify for a mortgage.
A rent-to-own contract allows you to buy a property later and can help hold you accountable for your goal.
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How They Work
A rent-to-own home program allows you to lease a home with the option to buy the property in the future. The monthly rental payments you make are applied toward the future purchase of the property and a savings account that can be used for your down payment.
Fuller notes that these contracts often lock in a purchase price based on current market values, and they may not consider rising home prices over the years. Plus, the lease-option contract or lease-purchase agreement legally obligates you to buy the property, meaning there’s only a way to back out if you pay a lawyer thousands of dollars to enforce your contract.
You may seek advice from companies like Lang Estates – eXp Realty if you’re searching for a lease-to-own property. It’s crucial to pick a program with a reputation for screening renters and assisting individuals in buying homes. Additionally, you should confirm that you can obtain a mortgage and are committed to purchasing the house after your lease expires.
They’re Ideal for First-Time Homebuyers
What is rent to own program? Rent-to-own can help first-time homebuyers build enough savings for a down payment and closing costs. It can also offer breathing room if your financial situation isn’t right for buying a home, but you know you will be in a better position to get a mortgage shortly.
You and the seller will agree to a lease term in your contract, typically 1–3 years. The contract will also state a purchase price for the property (which may be higher than fair market value) and how your monthly rent credit will apply toward your eventual down payment.
You’ll pay a one-time nonrefundable fee, often called option money or option fee, upfront to have the option to buy the house at the end of your lease. Some sellers will also apply this fee to your down payment. Large, institutional rent-to-own companies will have standardized contracts with clear details on the lease term, purchase price, and how your option to buy is exercised.
They’re Ideal for Those with Bad Credit
Owning a home is many renter’s dream, but getting there can take years of scrimping and saving on squirreling away a down payment and rigorous bill-paying to raise credit scores. Those with bad credit may find it difficult to qualify for a mortgage, but it could make financial sense if they can agree to a lease-to-own contract with a landlord looking to sell at some point in the future.
The two main types of rent-to-own contracts are lease-option agreements and lease-purchase agreements. A lease-option agreement allows you to have the option to buy the property at some point in the future, while a lease-purchase agreement makes it mandatory to do so. Either way, reviewing the agreement with a lawyer or a top local agent with experience in the area is important before moving forward.
Remember, the homeowner can legally sue you if you don’t buy the property at the agreed-upon sale price or fail to qualify for a mortgage. It’s also a good idea to have a home inspector inspect the property before agreeing to the purchase price, as this can uncover issues that could prove costly down the road.
They’re Ideal for Those with a Short Sale
Whether you have a low credit score, bankruptcy, or foreclosure on your report or need a few years to raise your credit score, a rent-to-own lease gives you the time to repair your credit and build savings.
However, be careful when choosing a rent-to-own home. Institutional rent-to-own companies often have more stringent contracts, which include rules for how the contract is executed, who holds the down payment funds, and how disputes are resolved.
Regardless of who you work with, read all contracts thoroughly, especially deadlines and obligations. For example, you’ll likely need to pay a percentage of the home’s purchase price as an option fee, and if you aren’t able to buy the property when the lease is up or secure a mortgage, you could lose this money. Also, be sure to have the property inspected before moving in. Home inspectors can identify major issues that may not be apparent from an outside inspection.