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Rent to Own: Additional Information

Rent to own plans are rare enough that you might ask, “Is rent to own real?” Despite being an uncommon home buying option, rent to own agreements are real home-buying alternatives. The plans come with benefits for both the owners and the renters, but rent to own also comes with risks that are not part of a traditional mortgage plan. In fact, the rarity and complexity of rent to own is part of why there are so many rent to own FAQs.

For example, what does rent to own mean? In a rent to own plan, a potential buyer temporarily leases a property from the owner with the intention of purchasing the home outright at the end of the lease. There are two kinds of rent to own agreements: lease with option to buy and lease-to-own. In the first, the renter signs a lease and has the potential to buy the home at the end of the agreement. In the second, the renter agrees outright to take the home at the end of the lease.

How does rent to own work?

Rent to own agreements commonly last from two to five years, and they are a longer form of home sale. A person can find a house rent to own option, or a townhouse, condo, apartment or property for sale. As part of the purchase, the buyer negotiates a rental rate with the current owner. Those who do not currently qualify for a mortgage get to move into a new home, start making payments and repair their credit until they can apply for financing.

At the end of the contract, the owner promises to sell the home for the previously agreed upon purchase price. This price does not change even if the market does, and a stable purchase price is one of the benefits of a rent to own agreement.

Can you rent to own with bad credit?

It is possible to rent to own with bad credit. In fact, the length of the agreement gives renters the opportunity to improve their finances before they apply for a mortgage or to even purchase the home with financing from the owner. In an owner financing arrangement, the buyer purchases the house from the owner at the beginning rather than after several years. However, it is similar to rent to own in that the buyer continues to pay monthly fees to the previous owner until he or she has paid off the cost of the house.

In both rent to own programs and owner financing plans, sellers in may still prefer renters who have good credit. The renter will still have to pay monthly rent to the owner, and the current owner will prefer tenants who are reliable with payments and more likely to purchase the property at the end of the contract agreement.

What is an option fee?

An option fee is an additional cost that a renter must pay when creating a rent with option to buy lease. The option fee is the price that the renter pays to ensure that the owner sells the property if that is what the renter chooses. If the renter decides not to purchase the property, he or she forfeits the option fee.

An option fee is usually a percentage of the purchase price, commonly between 2 and 7 percent, which usually amounts to several thousand dollars. In the instance that the renter does not have the cash for an option fee, an owners may accept assets such as cars.

What are the problems with rent to own?

There are pros and cons of rent to own, and one of the cons is the financial risk of putting off an official purchase. For example, the renter does not own the rent to buy home, so he or she will have no way to recuperate the value the investment should something happen to the property. Additionally, if the renter defaults on any payments, he or she may lose the home the same way it would be lost to foreclosure. However, unlike foreclosure, the renter would not have the option to sell the property or take an additional mortgage.

Further, the agreement on lease-purchase homes functions on the assumption that the renter will be capable of purchasing the property after a few years. Should the renter fail to secure financing for the home at the end of the lease term, the renter loses their investment in the home and the owner is left without any potential buyers for the property.

Is rent to own a good idea?

Whether a rent to own contract will work for you is dependent on your specific needs as you search for a home. There are advantags to both styles of rent to own contracts, but there are also pitfalls, as stated above. Rent to own gives potential buyers a chance to explore the neighborhood before they make a home buying decision. Other rent to own benefits include the following:

  • Settle down. The renters may not be able to buy the home outright just yet, but they can move in and work up to it. By moving into a home that the renter intends to buy, he or she saves on what would have spent moving to a new home without the rental option.
  • Build equity. In the strictest terms, renters do not build equity in the way that homeowners do. However, those who have rent to own agreements are putting a portion of their rent each month towards the down payment or closing costs of a home and are therefore generating property value that would have been lost in a different rental.
  • Seal a purchase price. No matter what the housing market looks like in five years, if a renter has a lease purchase contract with the owner, the purchase price cannot be adjusted. This is a good option for people who believe that their financial situation will change but want to take advantage of a good market when they can.
Do you need a down payment for rent to own?

There are rent to own with no down payment options when a property is for rent by the owner. However, whether or not you will be required to make a down payment is dependent on the kind of contract you negotiate with the current property owner. A down payment may be required for a lease purchase agreement or the owner may take a piece of the renter’s monthly payments to count as the down payment.

If you plan to enter an option-to-buy lease agreement, an option fee will be required upfront, however. While this is not a down payment on the property, it is a comparable sum that must be paid early-on. Families that need more time to save for an out-of-pocket expenditure may find that they need to finance the cost of the option fee.

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