(NewsReady.com) – Home ownership can feel unattainable, as the costs of home ownership continue to skyrocket. However, rent-to-own may be the path to secure a home of your own.
What Is Rent-to-Own?
A rent-to-own agreement is an arrangement in which the tenant rents the property for a certain period of time. During that time, you have the option to buy the home before the lease expires. The rental period allows the renter – you! – to try out the home and neighborhood before you commit to the purchase. It also allows you to build equity in the home before you take out a mortgage.
The landlord benefits too, because this arrangement tends to attract high-quality tenants, and you may even be able to lock in the purchase price in advance, depending on the type of contract you and the landlord choose to use.
So How Does It Work? There Are Two Options
At the start of the rent-to-own contract, you as the tenant can pay an option fee, which is a percentage of the purchase price. How much that fee is is negotiable, but this option fee is what gives you the option to buy the property.
The rent price is likely to be a bit above market rate, too. That is because the “extra” is used as rent credit that count towards the down payment on the property. Instead of paying out a large sum all at once, a slightly higher rent helps spread out the burden over the rental period. The option fee and rent credits help lower the purchase price for you if you choose to buy, but be aware that you will lose that investment if you decide to pass on the property.
During this time period, the landlord cannot sell the house to anyone else. When the lease ends, you can choose to buy the home, or move on to another location. If you choose to buy the home, you will work with the landlord to set the purchase price.
As with any home purchase, setting the purchase price usually involves an appraisal from a certified appraiser to determine the property value. If the agreement allows for it, both you and the landlord can each hire independent appraisers, and your agreement can also describe what to do if those appraisers come up with different home values.
But what if you don’t want to use a lease-option agreement?
The lease-purchase agreement works similarly, but it comes with an obligation to purchase the property once the lease ends. Unlike the lease-option, you don’t get to walk away when your lease is up, unless there is a contract breach or you cannot secure a mortgage.
During the rental period, you are likely to be responsible for repairs that would normally fall to the landlord. You must also verify whether you are responsible for other fees during this time, like taxes or homeowner association fees.
How Do I Know This Is Right For Me?
There are a few things to check to make sure rent-to-own is the right path for you.
You need to have good credit, or be able to raise your credit score enough by the end of the lease term. You also need to qualify for a mortgage, and it’s a good idea to pay down any other debts you may have during your rental period, too.
If you can’t secure a mortgage easily, take the time to increase your employment history so that you can better secure a mortgage in the future.
Any rent-to-own contract should be examined by a licensed real-estate attorney. You, as the potential buyer, must take the time to make sure you understand the contract and can meet the terms – just as you would any other contract.
Make sure to verify the deadlines, and check how much of the option and rent payments are applied towards the purchase price, how to exercise the option to buy, and any other important details.
The process may be daunting, but rent-to-own is a fantastic way to help some buyers, like you, achieve their dreams of owning a home at last.
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