4 ways rent-to-own can help you buy a home

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Lease-to-own arrangements are coming back into fashion as interest rates rise.


Key points

  • Lease-to-own gives those with low credit the time to build their credit.
  • Each part of a lease-purchase agreement is negotiable.
  • Buyers should hire a real estate lawyer to review their contract before signing.

Although home prices in some parts of the country have fallen, the median price of a single-family home still rings in at just under $385,000. With mortgage rates hovering around 7%, the monthly payment alone is pushing many potential buyers out of the market. For these buyers, an alternative like rent-to-own may be worth considering. Here, we outline how rent-to-own works, how it can help buyers get into a home now, and some red flags to be aware of.

What is hire-purchase?

Rent-to-own, sometimes called “rent-to-own”, is an agreement in which you rent a house for a fixed period of time with the option of buying it when your lease expires. While the lease is active, a portion of each rent payment goes toward a down payment on the home.

4 ways rent-to-own can help you buy a home

For some, rent-to-own is an alternative to buying a home. Here’s how it might work for you.

1. Approval May Not Be So Strict

If your credit score isn’t up to snuff but you desperately want to buy a home, it may be easier to qualify for a rent-to-own arrangement than a traditional mortgage. In fact, the seller may not even perform a credit check. That’s because they know that if you decide later that you don’t want to buy the house or can’t qualify for a traditional loan, they can keep an option fee collected along with the rent credits. collected each month (more on those in a moment).

2. Rent-to-own saves you time

Let’s say you sign a three-year lease. This gives you 36 months to get your credit score in shape. It also gives you time to save more money for the eventual purchase of the house.

3. Everything is negotiable

Everything related to the lease-purchase is negotiable. You work with the seller to determine, for example, if there will be any option fees due and which party will pay for repairs to the home (costs are usually shared).

A rent-to-own agreement involves dozens of details, but these are all things that you can negotiate in your favor. Additionally, hiring a real estate attorney to review the contract before signing further protects your interests.

4. Can lock your price

If you live in an area of ​​the country where home prices never seem to go down, locking in a sale price at the start of your lease means you don’t have to worry about what the market is going to do over the next few years. Peace of mind lets you focus on what’s important, like paying off debt and saving money.

This fact cannot be overstated: There is rarely a Real estate agent involved in a lease-to-own situation. And if there is a real estate agent, he normally represents the seller. As the buyer, it’s up to you to carefully check the details of the deal and hire a professional to make suggestions.

How it works

Let’s say you find a neighborhood you like and a landlord willing to make a rent-to-own deal. The process goes like this:

  • You will provisionally agree to the terms. One of these conditions implies that you will accept the sale price now or at the end of your lease. There are pros and cons to both. If you agree on a price now, you don’t have to worry if the value of the house increases during the term of your lease. If you wait to agree on a price, the value of the home may decrease and you may get a better deal.
  • Find out if option fees are required. This is also called “option money” or “option consideration”. If the seller charges a fee, you will have to pay the money when you sign the lease. Option fees are generally between 2.5% and 7% of the value of the house. Let’s say the current value of the house is $200,000. This means that option fees could vary between $5,000 and $14,000.

A note on option fees: The option fee may or may not go towards the price of the house. If not, you might want to walk away. Naturally, the owner wants to keep the money, but it’s in your interest to make sure it goes towards your down payment if you decide to buy. This is just one example of why you want to hire a real estate attorney to review the contract before signing it.

  • You will also want to contact a mortgage lender. Since you want your option fee (if you pay one) and a portion of each monthly payment to go towards the down payment, you will need to request a mortgage lender the best way to structure the down payment so you won’t have trouble getting a mortgage when you’re ready. Some lenders are nervous about approving a loan when the down payment has been made as part of the rent and it can be helpful to have a lender on board before you close the lease.
  • Once the details are settled, you will sign a lease for a period of one to three years (or more if you accept it).
  • Each month you will have pay more than other tenants in the area, but a portion of each payment is allocated to the down payment. For example, while others are paying $2,000 a month, you might be paying $2,300, of which $300 goes into a deposit fund. After one year there will be $3,600 in the fund and after three years there will be $10,800. If you also paid an option fee, hopefully you’ve structured the contract to serve as your down payment as well.

Even if you totally fall in love with a home, you can walk away from any deal that doesn’t benefit you financially. Although rent-to-own homes don’t come on the market often, it’s worth the wait for the right one.

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