(ModernSurvival.org) – With housing costs on the rise coupled with the daunting process of obtaining a mortgage, the idea of purchasing a home can seem like a pipe dream. Fortunately, there are financing options out there that make this dream attainable. For those who don’t want to take the traditional route, the rent-to-own is a path worth exploring.
What is a Rent-to-Own Agreement?
In a rent-to-own agreement, the tenant will rent a property for a set period of time with the option to purchase the home before the lease expires. This gives the tenant time to feel out the home and neighborhood to ensure they are the right fit for their family. In addition, this is an excellent way to build equity in the home prior to purchase. The contract is also good for the landlord, who can secure a tenant and, potentially, a purchase price for the home.
How Does it Work?
When the rent-to-own agreement begins, the tenant pays an option fee — a negotiable portion of the home’s purchase price securing the tenant’s option to buy the house. The tenant generally will pay higher rent than the fair market price because the payment includes additional rent credits that will ultimately go toward the initial down payment. Many prefer this method as it minimizes the sizeable down payment throughout the rental period.
Lease-Purchase Agreements
Similar to a rent-to-own option, lease-purchase agreements come with the obligation to purchase the home when the lease ends. Both the tenant and landlord enter this agreement with a commitment to the sale of the home unless the buyer cannot obtain a mortgage or either party breaches the contract. The buyer also takes over the responsibility of home repairs during the lease, which would otherwise typically fall on the landlord. The tenant is also responsible for verifying additional fees, such as the payment of taxes or homeowner association fees.
Who Should Consider Rent-to-Own Options?
A rent-to-own agreement is worth considering for potential buyers who:
- Need time to improve their credit score, clean up their credit history, or increase their employment history to secure a home mortgage
- Want to pay off other forms of debt before purchasing a home
- Know they will qualify for a mortgage but want to lower the initial down payment
Before signing a rent-to-own contract, the home should first be inspected by a real estate attorney and/or inspector to ensure everything is in order. Additionally, the potential buyer must understand the terms of the contract and have the ability to meet them. Other important factors to consider before jumping in are how much of the rental fees will be put toward the down payment price, how to exercise the option to buy, and what the significant deadlines of the contract are. While this may seem like a lot of extra hoops to jump through on the path to becoming a homeowner, a rent-to-own agreement is still a fantastic option that allows non-traditional buyers to finally fulfill their dreams.
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