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Many people think that the only way of becoming a homeowner is buying a property but there is a less known alternative being rent-to-own. Most first-time homebuyers choose to get a mortgage to finance the purchase requiring a good credit score and a cash down payment.
This can be difficult for people with poor credit scores that might not be eligible for traditional methods of homeownership but can have luck with a rent-to-own agreement. A rent-to-own agreement can give people the option to rent for a certain amount of time and the opportunity to buy the property before the lease expires. A standard rent-to-own agreement consists of two parts including a standard lease agreement and an option for renters to buy.
This option for home financing can help prospective first-time homeowners and can be beneficial in committing to an ideal property that doesn’t initially have the finances to purchase it. This renting agreement can be beneficial for aspiring homeowners giving renters the opportunity to save money for a down payment and improve their credit score before buying.
There are a couple of things to know when considering a rent-to-buy agreement as it’s more complicated than traditional renting with extra precautions to protect the buyer’s interest. In a standard rent-to-own agreement the buyer is required to pay the seller a one-time (typically non-refundable)upfront fee known as the option fee, option consideration, or option money. This fee will secure the option of buying the house in the future with the fee ranging between 1% to 5% of the purchase price.
Rent-to-own agreements should specify how and when the home’s purchase price is determined in some cases where the buyer and seller agree on a purchase price at the time of signing the contract. This price is often higher than the current market value as it increases value over time.
Another way to determine a selling price is when the lease agreement expires, and a price is determined based on the property’s value at the time of expiration. Most buyers prefer to ‘lock in’ the purchase price especially properties in the markets when home prices are trending upward and may become more expensive in the future.
Once a price is set, the next deciding factor is a lease percentage agreement where a percentage of lease payments can be applied to the purchase price that can save money when the time comes to purchase the property. For example, paying $1,200 in monthly rent for three years with 25%credit towards your purchase can add up to $10,800 in credit towards purchasing the property.
There are two different types of rent-to-own contracts with the lease-option or lease-purchase. A lease-option contract offers buyers the right (not obligation) of buying the home once the lease expires while giving buyers the option to walk away if they don’t want to purchase without the obligation to buy or continue paying rent.
Some rent-to-own agreements can require renters to take responsibility for any homeowner association fees, insurance, and taxes with a requirement for renter’s insurance policy to cover losses and liability coverage if someone is injured on the property. Buyers should check for repair and maintenance requirements in the contract.