Chances are that you’re like the majority of homebuyers, in need of a mortgage to purchase a house. To qualify for a mortgage, you’ll need the cash for a deposit and a good credit score.
Without both of these, the traditional route to becoming a homeowner will be out of the question.
There are alternative housing options though; a rent to own agreement may be a great way of becoming a homeowner. With rent to own homes, you’ll rent the property for a length of time with the option to buy the house once the lease expires.
So, what are the options for affordable homes?
In this article, we’ll take an in-depth look at the rent-to-own process.
What Is a Rent-to-Own Agreement?
A rent-to-own agreement is an arrangement where you commit to renting out a home for a set period of time, with the option to buy the property once the lease runs out.
A rent-to-one agreement will include a lease agreement along with the option to buy the home at a later date.
There are two types of contracts:
- Lease Option Contracts – you have the right to buy the property once the lease expires
- Lease-Purchase Contracts – you are required to buy the property once the lease expires
With both options, you’ll pay rent for the duration of the lease. Make sure you understand which contract you’re signing up for. The last thing you’d want is to be obligated to buy a home you cannot afford.
In some cases, a certain percentage of the rent may go towards the purchase price. Some rent-to-own contracts require you to maintain the property while paying for any repairs.
What Are the Upfront Fees?
When you sign up for a rent-to-own agreement, you’ll pay the seller an upfront fee known as an option fee. This fee gives you the option to buy the property at a later date.
The option fee is generally negotiable. Typically, this fee will be between 1% and 5% of the purchase price.
Agreeing On a Purchase Price
Rent-to-own agreements must state when and how the purchase prices will be determined. Often, the purchase price will be agreed upon when the contract is signed. This may be for a price above the current market value.
At other times, the purchase price may be determined once the lease expires. This will be based on the current value of the property.
Some buyers like to lock in the purchase price early on. This is particularly useful when property prices are on the rise.
Maintenance On a Rent-to-Own
In certain circumstances, you may have signed an agreement whereby you’re responsible for the maintenance of your rent-to-own property. Generally, this will be the landlord’s responsibility, but do read your contract thoroughly.
Because the seller is responsible for paying any taxes, insurance, or homeowner association fees, so they’ll usually cover these costs. However, you’ll still need to take out renter’s insurance.
Make sure that you understand your obligation toward maintaining the property. This may include, mowing the lawn, raking leaves, and clearing out gutters.
Whatever the expectation is on you in terms of maintenance, make sure you order an appraisal, have the home inspected, and ensure the property taxes are up-to-date before you sign your agreement.
Buying the Property
When the contract ends, depending on the type of contract you have signed, you may be required to buy the property. To pay the seller, you’ll probably need to take out a mortgage.
If you decide you’re not going to buy the house, or you’re not able to secure a mortgage by the time the lease ends, the option expires and you’ll need to move out from the property, just like if you were renting.
If you don’t buy the property, it is likely that you’d forfeit the option fee and any rent credit you may have earned. However, you will no longer be obliged to keep renting the home or to buy it.
If, however, you have the lease-purchase contract, you will be legally obliged to purchase the property once the lease has come to an end.
Who Is Best Suited to Rent-to-Own Homes?
A rent-to-own agreement is a perfect option for someone who wants to buy a property but who isn’t ready to do so financially. This type of arrangement allows you to get your finances in check, improve your credit score, and save for a down-payment while securing the house you’d like to own.
If both the option fee and a percentage of the rent go toward the purchase price, you’ll be able to build equity.
Traditionally, this type of alternative low-income housing has been targeted at those that cannot qualify for traditional home loans. There has been another group that is often overlooked, those that would struggle to obtain non-conforming loans.
If you’re looking for alternative housing options, the rent-to-own model may be well suited to your needs.
There are many great advantages of rent-to-own agreements. They let would-be homeowners move straight into the house while allowing them to work on their credit score and downpayment.
Not only that, but they allow you to live in the home that you’ll ultimately one day own, allowing you to put down roots and feel fully at home in the property that you’re renting.
If you think that rent-to-own might be the option for you, get in touch today to learn more about the process.