Rent-to-Own homes are a way for people who don’t qualify for a mortgage, but want to buy a house. This option allows a person to lease the house with the option to purchase at the end of that term. It’s not a common way to purchase a property, and the selection of rent-to-own properties is tiny compared to the selection of properties available purely for lease or sale. Still, some people manage the process successfully. Here are some things that make renting-to-own a potentially good idea.
What does it mean to be close to qualifying for a mortgage? You might have a bad credit score that is below what most lenders look for. You might have a good job, or gotten one with a significantly better salary, but you haven’t been there long enough for a lender to consider it a stable source of income to repay your mortgage over the long run. Similarly, you might be successfully self-employed, but not have a long enough track record to make lenders comfortable.
If any of these describe your situation, renting to own might be a good idea. You can lock down a property you like now and possibly save yourself a move or two. Then you’ll have some time, typically in two to three years, to improve your credit score, lengthen your employment history, increase your savings or do anything else you need to make yourself a stronger mortgage applicant.
When you rent to own, you pay a lease option fee to secure your right to purchase the property, and its usually nonrefundable. So be wary of getting into this if there’s a more than 50/50 chance you’re going to move and not buy. If you don’t ending up buying, you’ll also have wasted money on the nonrefundable rent credits. These are a portion of your monthly rent payment that the landlord/seller credits toward your down payment if you buy, but keeps as compensation for having taken the property off the market if you don’t.
Since it’s less common, the rent-to-own process isn’t as tightly regulated as the home-buying industry or even the rental industry. This lack of regulation can be a good thing, in that it gives would-be buyers and property owners more freedom in negotiating the purchase option part of their contract. On the other hand, the lack of industry standards might make it easier for unscrupulous owners to take advantage of unsophisticated buyers. In addition, there isn’t nearly as much educational material available on renting to own as there is on buying a house outright.
In other words, there’s little that’s “standard” in these contracts, making it especially important that you know exactly what you’re agreeing to. If you can’t understand both the legal and financial aspects of a rent-to-own contract, you shouldn’t sign one. See: NOLO’s article on Rent-to-Own Real Estate Full of Pitfalls.
Renting to own a home isn’t for everyone. There are many things that can prevent you from buying the home at the end of the lease term, from a change in your life circumstances to a continued inability to qualify for a mortgage – and there are penalties, in the form of nonrefundable fees and costs, for not carrying through with the purchase. Though for some, it can allow them to buy their dream home without going into debt.
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