People who want to buy a new home often apply for a mortgage from a bank. But not everyone may be eligible for this scheme. To qualify for a mortgage loan, a person must have a good credit score. They would also need to make a down payment in most cases. If someone does not have the required credit score or cannot make a down payment, they can look for rent-to-own homes.
How rent-to-own works
In the rent-to-own model, the buyer rents a home for a predetermined period. After the lease ends, they can choose to buy the property from the owner. But instead of making a down payment or hefty upfront payment for the house, the buyer can split the amount into installments. These installments are added to the rent paid each month during the lease tenure. When the lease expires, the excess money paid as rent is used for the purchase.
Payment structure
A rent-to-own home is ideal for those who want to buy a property but have limited funds for a down payment or a poor credit score. It gives people time to save and work on improving their credit rating. There are two kinds of payments to be made in the rent-to-own model.07
- Rent credits, also known as rent premiums, are payments made in addition to rent every month.
- An option fee is paid once. It is a nonrefundable deposit, typically 1% to 7% of the purchase price. For instance, if a home costs $200,000, the fee ranges between $2,000 and $14,000.
Both payments are usually held in an escrow account until the renter is prepared to purchase the home. One should note that if they change their mind and do not buy the house, they could lose the initial deposit and face legal consequences.
Types of rent-to-own contracts
Renters may come across two common types of rent-to-own agreements: lease option and lease purchase. Both let the individual rent the home for 1 to 3 years and purchase it at the end of the term. That said, the contracts of the two agreements have some differences one should know about.
Lease option agreement
This agreement requires an individual to pay the homeowner a one-time option fee and monthly credits during the lease term. These payments reduce the property’s purchase price later when the person decides to buy the home. Before signing the contract, one typically negotiates the purchase price with the seller by determining how much the home is worth. One could let the agreement expire if they no longer want to buy the property, but one may lose the option fee and rent credits.
Lease purchase agreement
This agreement is similar to a lease option agreement. One leases the home for a couple of years while a certain percentage of the rent is set aside and directed toward the down payment to buy the home. But, if one enters a lease-purchase agreement, one is obligated to buy the house at the end of the term. The homeowner can sue the renter for breaching the contract if the home isn’t purchased. Also, one will lose exclusive claims to the home and all rent credit accumulated.
The seller and buyer agree to a purchase price when the lease is signed. Setting a price in advance gives one a better idea of how much needs to be borrowed for a loan. If one picks a lease-purchase agreement, one should start loan shopping while living in the home or as soon as the price is agreed on. If one cannot secure funding by the end of the lease term, they will lose their accumulated rent credit.
Finding a rent-to-own home
A rent-to-own home is ideal for those who cannot make a down payment or have poor credit. One could use several tips to simplify the purchase.
Do an online search
Using simple keywords like “rent-to-own homes without a down payment,” “rent-to-own homes with bad credit,” or “rent-to-own homes in my area” will help find eligible properties nearby. Potential renters can also check online rent-to-own portals. These portals have an impressive database to help people locate available rent-to-own properties.
Hire a real estate agent
Real estate agents offer advice and help people navigate the process associated with property purchases. One must ensure the agent is familiar with rent-to-own homes and associated agreements.
Apply to a rent-to-own program
Various rent-to-own home programs help people understand the qualifications and requirements they need to meet to get their application approved. Potential renters can make a more informed decision after applying to these programs.
Make an offer to all types of sellers
Sometimes, the property one likes may not be listed as rent-to-own. In this situation, one could make an offer to the owner directly or by consulting with the real estate agent. If the offer is good, the property owner might be convinced and agree to give the house on a rent-to-own basis.