Rent-to-own homes are a great option for homebuyers who want to save money for a down payment and improve their credit. Understanding all the benefits and risks is essential before you sign on the dotted line.
Down Payments
There are several options for down payments for rent-to-own homes. The specifics will depend on the market conditions and the homeowner’s situation. A good idea is to have a real estate agency like Lang Estates that will help guide you through the process and review any contract or lease you’re considering. Generally, you’ll pay above-market rent and an additional portion that goes toward the home’s purchase price at the end of the rental period. This can be a very helpful way to build up credit and save for a down payment. Because you’re technically purchasing the property at the end of the rental period, treating the process with as much care as a typical home purchase is important. Inspect the property, consult a real estate attorney and get your credit in tip-top shape. By doing so, you can ensure that by the time your lease ends, you can qualify for a mortgage and are ready to move into your new home.
Rent-To-Own Programs
There are many reasons homebuyers opt for a rent-to-own property. They may be paying off debt or saving for a down payment. Or they may not qualify for a mortgage right away because of poor credit or other financial challenges. The exact terms of a lease-to-own contract vary depending on the program or homeowner, but generally, part of your monthly rental payment will go toward your future home purchase. This can be a great way to start saving for a down payment and work on your credit. For homeowners, a rent-to-own program in Clarkston, MI, can provide a larger buyer pool than the typical market. This can be especially helpful in a slow market when it’s more difficult to sell a property or find a buyer that qualifies for a mortgage. Also, since a portion of the rent will go toward the eventual purchase price, this can help lower your monthly payments. In addition, the homebuyer will have more invested in the property, making them more likely to carry through with their purchase agreement.
Lenders
Unlike traditional home purchases, rent-to-own homes are typically less regulated, and many stipulations are negotiable. That’s why you should treat it like any other home purchase and consult with a real estate attorney and home inspector before signing the contract. Most contracts will include a rental lease agreement along with a purchase option. The option specifies a purchase price at the end of the lease term and usually has how a portion of your monthly payments is applied toward the eventual property purchase. You may also be required to pay a one-time, non-refundable fee upfront to secure the right to buy the property. This is referred to as an option fee, consideration or option money and is typically equal to one to five percent of the purchase price. Before agreeing to such an arrangement, you should ensure you qualify for a mortgage at the purchase price stated in your contract.
Contracts
Most rent-to-own contracts stipulate that some or all of your monthly payments will go toward the home’s final purchase price. The exact terms of this will vary depending on the program or property owner and your state laws. Some states require that the purchase price be set when the contract is signed, while others allow for a later determination based on the home’s current market value. The lease-to-own contract may also stipulate that you’re legally obligated to buy the home at the end of the agreed-upon leasing period. This could be a problem if you’re not sure that you want to move into the house or aren’t ready for homeownership, especially if you’ve paid non-refundable fees (such as an option fee) that you won’t get back if you decide to walk away from the contract. It’s important to treat a rent-to-own agreement as if you are purchasing the home immediately and to work on your credit and financial situation to ensure you qualify for a mortgage by the time your lease ends. Otherwise, you could lose all your money invested in your rent-to-own home.
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