How Rent-to-Own Programs Work

For many renters, owning a home is a common goal, but becoming mortgage-eligible might require years of frugality and saving to accumulate a down payment. Another option for purchasing a property is through rent-to-own initiatives.

The process usually involves an upfront option fee and a purchase contract that spells out how much of your monthly rental payment is applied to the eventual purchase price.

You Pay a Monthly Lease Amount

You sign a contract that spells out the home’s purchase price, the lease’s length, and other details. Sometimes, a portion of your monthly rent payment goes toward the down payment when you buy the property at the end of the lease period.

The purchase price you lock in at the beginning of your lease is usually inflated to reflect rising home values, but your home value could also decline throughout your lease period. That’s why it’s important to have a mortgage pre-approval from your lender before you enter into a rent-to-own contract.

With the help of a professional at firms like Lang Estates – Your Local Realtor, you may select a rent-to-own program that will give you time to develop equity in your rental home while simultaneously repairing your credit and saving for a down payment. The option to purchase the property expires, and any money you contributed toward its purchase price if you choose not to purchase it after your lease ends.

You Have a Purchase Option

Some rent-to-own contracts specify a purchase price when the lease ends. That can be a problem, especially in areas with rising home prices, because you may be paying more than the house is worth at that point. To avoid this, perform due diligence by ordering an independent appraisal, ensuring property taxes are paid, and liens are cleared, and doing a home inspection.

In a competitive housing market, those who want to buy but can’t qualify for a mortgage often turn to rent-to-own programs to get into a new home. The leasing period can help them build a strong credit history and save for a down payment, making them more attractive to a mortgage lender. And for homeowners in high-cost markets where jumbo loans are the norm, a lease option can be a way to move properties while avoiding foreclosure and reducing the risk of future losses.

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You Can Cancel the Lease

What are rent to own programs? With rent-to-own agreements, you and the homeowner will sign a lease contract that includes a purchase option (or a lease-purchase agreement). The contract defines how long you’ll rent the home before it becomes yours. It will also spell out whether or not the purchase price is inflated at the beginning of your lease, and it will outline how much of your rent credit will go toward purchasing the property (if any).

If you’re considering a rent-to-own agreement, understand what happens if you can’t qualify for a mortgage after your lease term ends. If you can’t get a loan, you’ll give up your claim to the home and all the rental credit you’ve earned.

Rent-to-own agreements can provide a path to homeownership for people who can’t easily qualify for a mortgage. They can also help you save money on your down payment and give you time to work on a plan to raise your credit score.

You Get a Down Payment

Homebuyers in expensive urban real estate markets and those not qualifying for mortgages due to less-than-stellar credit histories have a unique need. A rent-to-own program can make the dream of homeownership more attainable for these would-be homebuyers.

Most rent-to-own contracts include a purchase option. This means that, at the end of the lease term, the tenant/buyer can buy the home at a price agreed upon in advance. A percentage of each rent payment may be applied toward the purchase price.

While a rent-to-own agreement might seem straightforward, some big risks are involved. Before entering into a lease-to-own contract, you should carefully review the contract (possibly with a real estate attorney) and thoroughly research both the property and the seller. This will help you avoid being caught off guard should you fail to qualify for a mortgage at the end of the lease term.