Rent to Own: What You Need to Know
A lot of people hear the term, rent to own but are not sure exactly what it means? How does it work? Does it make purchasing a home with a smaller down payment easier? What about bad credit? Here is an overview of what you as a potential home buyer, seller, or owner ought to know about rent-to-own.
What is Rent to Own?
In simple terms, rent-to-own is renting with an option to purchase. Rent to Own agreements can extend to more than just real estate. A lot of businesses offer rent-to-own options for furniture and artwork as well. A rent to own deal created using an Occupancy Agreement and an Option to Purchase Agreement. These agreements mean that the then tenant-buyer has the option to purchase the home at a pre-determined price within a certain timeline.
Rent to own is also commonly known as lease to own, lease option, lease purchase, or rent to buy.
How Exactly Does Rent to Own Work?
The tenant-buyer puts forward a small down payment. This is credited towards the purchase price when they purchase. The exact amount varies, however, the down payment is less than what would be required in an immediate sale situation.
The tenant-buyer makes monthly payments and a portion of each payment accumulates additional down payment funds which are also credited towards the purchase price when they purchase.
During the rent to own program, the tenant-buyer works to either establish or repair their credit- by paying off debt and getting caught up on bills.
At the end of the program, the tenant buyer applies for financing through a conventional lender.
With an accumulated down payment and a mortgage pre-approval, the tenant-buyer purchases the home and officially becomes a homeowner!
Benefits of Rent to Own for Landlords
Generally, tenants that are on rent-to-own take better care of the property. This is because most have the mindset that they may own it one day;
Your profit is fixed at the time of the option.
Benefits of a Rent to Own for Tenants
This can be a great option if you do not have the down payment now, this is because you will have it at the end of your lease, as a result of the additional payments
If you are not 100% sold on where you want to live you can try out the neighborhood and if you change your mind later, you can just cancel the option to purchase the house
If the real estate market takes another major hit and collapses, if the home is worth less than $280,000, you do not have to go through with your purchase.
If the market price of this home is more than $280,000 at the end of your lease, you still get to buy it for the same $280,000.
Disadvantages of Rent to Own for Tenants
If you have non-existent or poor credit there is no guarantee that a bank will give you your financing when you exercise your option. This means that you may still have to improve your credit score or find someone to co-sign your application