In recent years, the cost of homes is increasing due to an increased demand for housing. As it stands, many densely populated cities and other populous areas require high incomes and large savings in order to afford the purchase of a home. If you are similar to most Americans, you likely will not be able to afford the entire cost of a home upfront.
Most potential homeowners must acquire finances for the purchase of a home through a lender. However, obtaining a mortgage can require applicants to have high credit scores, make large down payments and meet other qualifications. Not everyone who applies for a mortgage will qualify. In fact, a poor credit score is one of the leading reasons for the denial of a mortgage.
If you cannot currently afford to buy a home or you do not qualify for a mortgage, rent-to-own options may provide you with a fantastic alternative route to becoming a homeowner. Rent-to-own properties give you the opportunity to live within the home that you would like to purchase while improving on your credit score and personal finances. While living on a rent-to-own property, you make regular installments towards rental amounts and your future purchase of the home.
If you cannot qualify for or do not wish to obtain a mortgage, you may have the option of taking part in a rent-to-own agreement. In doing so, you will be given the opportunity to move into the home that you intend to purchase down the road without having to pay the full cost of the home immediately.
Rent-to-own contracts can vary between property owners, however, there are certain conditions that are considered to be a standard within rent-to-own agreements. That is, the family or individual who enters the rent-to-own agreement will rent the home for a predetermined amount of time and may purchase the home at the end of the rental period.
During the rental period, the prospective homebuyers will make monthly rent payments to the owner of the home. A portion of those payments is used towards the cost of the home in order to reduce the purchase price when it comes time to buy.
If you are considering a rent-to-own contract, it is important to review the listed purchase price carefully, as this is one of the most crucial aspects of rent-to-own agreements. The purchase price is the amount that you will have the option or obligation of paying in order to purchase the home at the end of the rental period. The portion of rental payments that are set aside for the purchase of the home will reduce this price over time.
Depending on your rent-to-own agreement, the price of the home may be determined before or after the rental period. In most cases, prices are locked in upfront. However, this is not always the case. Which you may benefit from will depend on whether or not the home gains or loses additional value during the rental period.
For example, if the home’s value raises by $10,000, you will have saved $10,000 if the purchase price was locked in before the rental period. However, if it was not locked in, you would be responsible for that additional $10,000 if you wanted to purchase the home. The value of a home changes over time and, depending on where and what type of home you choose to live in, this can occur drastically.
There are potential advantages and drawbacks to rent-to-own properties. While rent-to-own opportunities may be incredibly advantageous to some homebuyers, this type of home purchase is not the ideal solution for every buyer. By learning more about these properties and the potential benefits and downsides that you may face, you will be able to make an informed decision on whether or not to engage in a rent-to-own contract.
Rent-to-own properties offer homebuyers a unique gradual progression from renting to buying a home. Since a portion of rental payments is put towards the purchase of the home, prospective buyers can begin to build equity before purchasing the property. This equity will essentially reduce the amount that the buyer would need to pay at the end of the agreement.
However, buyers will likely still need to qualify for a mortgage at the end of the rental period. If their finances or credit score has not improved, they may not be able to qualify for a mortgage and purchase the home that they have been making payments on. Depending on the contract, backing out at the last minute may not be possible or the former tenants may be required to forfeit any money that has already been put into the purchase of the home during the rental period.
Most rent-to-own contracts will also include an option fee. An option fee is a non-refundable fee that provides the prospective buyer the option to purchase the property following the rental period. While similar to a down payment, the option fee is not generally as high as a down payment. Still, if the renters do not purchase the home at the end of the rental period for any reason, the option fee costs will not be refunded.
Finding rent-to-own properties do not follow the same procedures as purchasing a home. In fact, rent-to-own properties typically take more time to find and it can be time-consuming to negotiate with the owner of the home on the rent-to-own agreement.
However, you can utilize housing listing websites that provide filters that will allow you to narrow down your search to show rent-to-own listings within your community. These websites provide an excellent way to review the properties within your area as well as the price points that you will likely encounter. If you know of a property that is rent-to-own, you may also be able to contact the seller directly.
Furthermore, some homeowners that are selling a home may be open to the idea of rent-to-own, especially if their home has sat on the market for quite some time. If their homes have not sold over a lengthy period, they are more likely to be receptive to the idea of a rent-to-own agreement. If a seller already has multiple offers on a home and will likely sell their home quickly, they likely will not be interested in a rent-to-own contract.