Buying a home can be challenging if you don’t qualify for a traditional mortgage. Whether it’s because of income, or not having enough savings for a down payment, sometimes qualifying for a mortgage is next to impossible. And even if you qualify, a busy housing market might make finding the perfect home difficult.
An alternative to qualifying for a traditional mortgage is buying your home through a rent to own arrangement. If you’re already renting a home you love, and the landlord wants to sell it, a rent to own home could solve your home buying problems. And, if you want to move into a property right away without having to wait for the lengthy home buying process, this could be an option for you too.
How do rent to own homes work?
Rent to own homes allow you to live in a home as you work to buy the property. Every rent to own contract is different, but generally they have these things in common:
- The renter pays an option fee to the owner for the option to purchase the house at the end of the term (this money may or may not be refundable, and may or may not be applied to the purchase price of the house)
- Rent is paid for a specified length of time
- A portion of monthly rental payments goes toward the purchase price of the house
At the end of the lease period, depending on the contract terms, the buyer either a) purchases the property, b) comes to a new agreement with the property owner, or c) moves.
Types of rent to own agreements
There are two types of rent to own home agreements.
The first is a lease option agreement, and the second is a lease purchase agreement. While these may sound similar, it’s very important that you understand what type of agreement you’re getting into before you sign the paperwork!
Lease Option Agreement
With a lease option agreement, you will pay an option fee to the property seller. This fee will allow you to choose if you’d like to purchase the property at the end of the term. You and the seller will agree to a purchase price, and you’ll rent the property for a certain length of time. At the end of the term, you have the option to purchase the property.
Lease purchase agreement
With a lease purchase agreement, you will also pay an option fee to the seller which guarantees you the right to purchase the property at the end of the term. Again, you’ll pay your monthly rental fees, and at the end of the term you must come up with financing to purchase the house at the price agreed upon at the start of the lease. The agreement states that at the end of the term, the buyer must pay the remainder of the balance due for the house.
Pros of rent to own
Rent to own homes can be a wonderful choice for a lot of reasons. If you can’t qualify for a standard mortgage, rent to own will give you the chance to become a homeowner. It can allow you time to pay off other debts before trying to qualify for a mortgage. If you’re already renting a home you love, it could give you the chance to buy it later without competition from other buyers as well.
Cons of rent to own
The rent to own process has some negatives as well. Typically, your monthly payments will be higher than if you were just renting the property. This is because part of your payment is going towards the purchase of your home. If home values go down after you’ve already agreed on a sale price, you’ll be stuck paying more for the property than it’s worth. And last, many times in a rent to own agreement, the renter will be asked to take on home maintenance and repair costs even before they purchase the home.
All of these negatives involve you paying more for the property than you might have to in a standard mortgage arrangement with a bank.
Before you enter a rent to own agreement, be sure to have an attorney speak with you about terms so you understand what your obligations are. Many hopeful homeowners have been crushed by the terms of their rent to own leases. The best way to make sure this doesn’t happen to you is by working with professionals who can make sure you’re not being taken advantage of.