Rent-to-own, All You Need to Know About How It Works

Rent-to-own: It might interest you to know that some people purchase their homes by taking on a mortgage. They make monthly mortgage payments until the home is paid off, then they own the home free and clear.

However, some people do not qualify for mortgages. Their credit scores might be too poor to pass a mortgage application. Or, probably they do not have the money needed for the down payment. If you are in this situation, getting a mortgage would be pretty tough.

Instead of spending the rest of your lives to paying rent, there is an alternative. This alternative is called Rent-to-own.

What is Rent-to-Own?

Rent-to-own allows people who lack the required credit and capital the chance to purchase the home at a later date while already living in it.

This is done through rent-to-own house agreements. How this works is that at the end of the rental period, they have the option to buy the home. Typically, this would end in the buyer re-applying for a mortgage and paying the seller for the house.

Contents of the Agreement of Rent-to-Own

Rent-to-own house agreements include the following:

• Option Fee

The option fee is part of almost every rent-to-Own agreement. The renter and owner agree on the fee the renter must pay at the beginning of an agreement. After paying this fee, renter is guaranteed to have the option to buy the house in the future.

The option fee is typically between 2.5 and 7 percent of the home’s purchase price. The fee is usually due in a lump sum at the beginning of the agreement.

In some cases, renters might be able to spread the fee out over the course of several months.

• Purchase Price

This is another important thing you must know when it comes to Rent-to-Own. The buyer and seller might agree on the purchase price of the house when creating the agreement. If so, the price is included in the agreement.

If the price is not determined, then the renter has the option of buying the property at that set price when the agreement is up. Also, the agreement needs to explain how it will be determined in the future.

If buying the house is in their best interest, savvy renters should do their best to lock in the purchase price in the initial contract. Home values typically increase, so buyers can get a better deal by locking in the price years before purchasing the home.

• Rent

This is another pertinent content you should know as long as Rent-to-Own agreement is concerned. Just like with any rental property, the renter must pay a set amount of money every month.

In some cases, all the rent money goes to just rent, and none of those contributions go towards the purchase price option. In other cases, monthly rent payments could partially contribute to the asking price of the home.

This allows the potential buyer to earn some credit to put toward the purchase of the home when the rental agreement is over which is more in line with a typical mortgage

• Maintenance Costs

Another important content is maintenance. It is very necessary as long the agreement of Rent-to-Own is concern.

Some owners handle maintenance themselves. Others require renters to take care of maintenance costs.

They also might require the renter to pay property taxes, home owners association fees, and other fees incurred from owning the property.

Its Importance

Some of the importance of Rent-to-Own is as follows; The importance of a Rent-to-own agreement is that it allows people with bad credit the chance to buy property. They have the chance to save up money while renting with the locked in option to purchase a home.

It also gives them the option to lock in a purchase price, if the owner allows it. Locking it in early could be ideal since home values typically rise over time, depending on the area. Please note that purchase prices might actually fall when the future buyer is renting the home.

Potential buyers can also test drive a home before buying it. They might realize they do not like the home as much as they initially thought. They can back out of the deal later instead of getting saddled with a mortgage.

Some Short-Comings of Rent-to-Own

One of the short-comings is that, if the potential buyer decides to walk away at the end of the agreement, then he forfeits all the money spent on rent.

This is mostly likely greater than the average standard rental agreement. Additionally, he would lose any money invested into the property. Also, the potential buyer also has no real control of the property.

Also, if he has trouble fixing his credit during the rental term, he would not be able to purchase the home because he will not be able to qualify for a mortgage. This might feel as if he wasted his time.

In a Nutshell

Though you have to pay special attention to the agreement, a rent-to-own is a good option for those who want to own a home.

Those who enter into a fair deal can benefit from a rent-to-own agreement. They have time to build up their credit and save for a down payment. They might even put some money into the home during the process.