In 2020, 21 percent of US consumers had a credit request rejected because their credit score was too low.
In today’s home market, a low credit score is just one of many reasons you may not qualify for a mortgage. You may not have enough money for a down payment. Or you just may not be financially ready to purchase.
But when your dream house comes along, what can you do? Luckily, there is another option for those who aren’t ready to buy a home the traditional route. It’s called renting to own, and it has many benefits for home buyers and home sellers alike.
Read on to learn all about renting to own: what it is, how it works, and why you should rent to own.
What Is Renting to Own?
Typically when purchasing a house you need a mortgage, which means you need a good credit score and enough money for a down payment on a house. Renting to own offers an alternative option.
With rent to own, you rent a home for a certain amount of time, after which you can exercise your option to purchase once the lease expires.
How Renting to Own Works
There are two parts of the process for renting to own: the lease agreement and the option to buy.
When beginning a rent-to-own contract, you pay an option fee, which is nonrefundable and paid upfront. This fee is negotiable and is between 1-5% of the purchase price.
You then sign a contract that outlines the specifications of the agreement. We will discuss the contract in more detail later.
Once the lease is up, you will be given the option to buy. Depending on the type of contract you sign, you may have a legal obligation to purchase at the end of the lease. In most rent-to-own agreements, the purchase is optional.
If you decide to buy at the end of the rental period, you must obtain the necessary financing. If you decide not to purchase the home, you’ll lose the money you had paid upfront.
Rent to Own Contracts
With a lease option contract, you have the option to buy the home at the end of the lease but can leave without purchasing if you decide you don’t want the home.
Lease-purchase contracts, on the other hand, legally require you to purchase the home at the end of the lease. These can be risky since you will have to buy even if you are still not financially ready at the end of your lease term. Review your contract with a real estate attorney to ensure you understand exactly what you are getting yourself into.
Both lease-option and lease-purchase contracts also outline several other aspects of the agreement.
Many rent-to-own contracts lock in a purchase price at the time of signing, which can be good for the buyer if the home market is trending upwards. If the price isn’t decided when the rent to buy contract is signed, it will outline when and how the purchase price is decided.
The contract will also specify the rent that the tenant will pay throughout the lease. Sometimes a portion of the rent will go toward the purchase of the house at the end of the rental term. The amount that is set aside will be outlined in the lease.
When a portion of the rent is put toward the purchase of the home, the rent is typically a bit higher to make up for that credit. If the tenant decides not to purchase at the end of the lease, this money is forfeited.
Home Maintenance and Repairs
In most rent-to-own contracts, the owner will continue to pay for insurance and property taxes since they still own the home. The contract can specify who is responsible for maintenance and repairs.
Before signing a contract, make sure you are clear on the terms. Regular maintenance, like mowing the lawn, is different from large repairs like replacing the HVAC system.
Benefits of Rent to Own in Today’s Home Market
There are several good reasons to rent to own. For one thing, it allows you to get your finances in order while locking in the home you’d like to purchase in the future. This is a great option for buyers who expect to be in a better financial position within a few years as it gives them a chance to improve their credit score and save up for a down payment.
In many cases, renting to own can allow you to lock in a purchase price so that you can buy the home at its current value in the future. This allows you to keep an eye on the home market and back out if home prices fall.
If you are unsure about a home or neighborhood, renting to own is a great option to “test drive” it before committing to the purchase. In doing so, you can become aware of any red flags. You can learn about hidden property issues or nightmare neighbors that you may not know about before a conventional home sale.
Finally, renting to own allows you to avoid some of the pitfalls of renting. If you choose to purchase the home at the end of your lease, you don’t have to deal with the hassle and expense of moving. Plus, if a portion of your rent goes toward the purchase price, you are able to build equity, which is not the case with regular rentals.
Sell Rental Property as Rent to Own
There are also many benefits of the rent to own route when selling a property. If you are willing to deal with the slightly more complicated structure of rent to own, you should check it out as an option for selling your rental home.
Rent to Own: Is It for You?
When you’re in the home market, renting to own is a great option for those who are not quite ready to purchase. Whether you need more time to decide if a house is the right fit or you need to get your financials in order, renting to own may be right for you.
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