Owning a home is a dream for most people, but it doesn’t always come true if you have bad credit. But, the rent to own concept was designed especially for renters that want to own, but can’t secure a mortgage.
Have you been turned down for a mortgage on a home or have been struggling with bad credit and stuck in a rental for too long? Find out if rent to own home could be your ticket into homeownership sooner than you ever dreamed possible.
Rent to Own Home
How does rent to own work? Not every home is available for rent to own, but there are many rent to own homes and rent to own mobile homes on the market.
So, with rent to own you will enter a one-year lease contract, just as with regular rental units. This one will differ because you will have given an option fee instead of a security deposit.
A portion of your monthly rent payment will be held in escrow while you are under your lease which will go towards the cost of the home should you decide to purchase after the lease is up, the option fee will also go towards the cost of the home.
After your lease is up and you have decided to buy, you must then go through a bank or lender and secure a mortgage. But, don’t let that scare you off because these homes often are owned by companies that understand situations like yours.
Lease to own is a slightly different design whereas the contract is not as binding as rent to own.
Why do most people choose the rent to own option over buying a home the traditional method? For one reason or another banks do not approve them for a mortgage, and rent to own has allowed you to have some of your rent costs go towards the total cost of the home.
Bad credit can stem from irresponsible decision-making, but it can also be something that is out of your control and held against you when trying to do something like getting approved for a mortgage.
Buy yourself time to rebuild and fix your credit as you are renting. If your credit score is less than 620, experts say that rent to own is the best option.
Take it for a Test Drive
When you are in a rent to own situation you will pay rent through the duration of the lease, and when the lease term is up you will have the option to buy the home, renew the lease, or move.
This option gives you the chance to see if a) you like the house & neighborhood, and b)you can afford the payment, utilities, and other bills before you agree to buy.
The Good Side of Rent to Own
Let’s look at the bright side of the coin, first. Some of the positive points of rent to own are:
- You have time to build your credit and save up while paying into a home
- Good for those with credit scores lower than 620
- You have the chance to own a home
- You have the duration of your lease to decide if you want to buy
Hopefully, you have more positive things to say about the situation and feel good about being able to purchase a home when you were turned down for a mortgage.
The Down Side of Rent to Own
The following list is things that are considered the downsides of renting to own. Not everyone will see these points as being negative, and you can choose to take them with a grain of salt, or just accept that not every situation can be perfect.
- You may be responsible for repairs and maintenance during the lease period
- Only a portion of your monthly payment may go towards the cost of the home
- You could end up paying more than the house is worth
While it is important to acknowledge the cons of the situation, if buying a house is important to you and you can not get approved for a mortgage right away, rent to own is a good option.
Why Rent to Own is A Gamble
Entering a rent to own situation can end up in the buyer’s favor, or may end up getting the seller more than the home is worth. How does that happen?
Because the final sale of the home will be at least several years in the future, the housing market could either go up or down in that amount of time. If the market goes up, the value of the home could go up. But, if the housing market crashes, the home’s value could drop dramatically.
Either way, the price of the home has already been agreed upon, and can not be changed.
Option Fees vs Down Payments
Are you aware of option fees being part of the rent to own? When entering into a contract for a rent to buy a home there is an upfront cost similar to the down payment on a home that you are purchasing.
These fees are nonrefundable if you decide after your lease is up not to purchase the home. However, if you do go through with the sale, the option fee will go towards the cost of the home.
Just as with mortgage rates, the option fees can fluctuate anywhere between 2% and 10% of the cost of the home.
Read the Contract Thoroughly
You may be in a rush to buy a home, but don’t let that get you caught in a situation that you do not want to be in. Reading the contract thoroughly, and getting a lawyer to read over it, too, will save you possible contract binding headaches down the road.
If there is anything that you disagree with, wish to have changed, or feel is out of your reach within the contract discuss it before signing. If the contract seems sound, then congratulations, homeowner!
Yes, You Can!
Finally, a break has come along for those with not-so-perfect credit to own the house of their dreams! You can, and you will be a homeowner- and we will be right there with you every step of the way!
Got questions about your potential rent to own home? We’ve got answers at Home Buyer Creators, reach out to us anytime!