Rent-to-Own Homes: What to Know

A “rent-to-own” is a contract that requires the prospective buyer to pay monthly rent to the owner of the home, with part of it going towards buying the home at a later date. The contract usually last for 2 to 5 years, during which time the two parties can arrange for the standard purchase of the home. This contract is suitable for people who have had their houses on the market for some time, and it could allow them to move while having someone in the house and thus generating money for their mortgage. On the other hand, it is an option for wishful homebuyers who have a bad credit history. While you may be unable to get a loan right away, you can find sellers who may be willing to rent a house to you with an option of buying later.

Merits and demerits to both parties

A rent-to-own contract gives the buyer time to raise a down payment and attain good credit record. This is on top of having the advantage of having a feel of the house and the neighborhood where it is located before buying. You should note that not every dollar that you will pay towards the house will go towards a down payment. It is the mortgage lenders who decide how much goes towards the down payment as well as the closing cost. Many lenders will only allow a credit for the amount that is paid above the market value for local rentals that will be held for the eventual cost of buying the home.

For instance, the homeowner could rent the house for a standard rent of $1,850. When negotiating for a rent-to-own contract, you can agree with the homeowner to pay $2,100 per month with the $250 as the credit for the purchase of the home. After the 3 year lease, you will have $9,000 that will be set aside. The money will be returned to you at the time of settlement and can be used as your deposit. If you decide that you will not buy the home after the lease, you will not get a refund.

The advantage to the seller is that they already have an eager buyer as well as a long-term renter to take care of the house as compared to the standard tenant. But there is always the risk of the renter choosing not to buy your house at the end of the lease and this means that you will have to go through the listing process again. The transaction gives the buyer the opportunity to lock in the price of the house in advance. In case the value of the house goes down, the buyer has an opportunity to negotiate. In case the value of the house rises more than expected, the buyer could get an upper hand.

What the contract entails

There is no standard details that should be included in the rent-to-own contract. The arrangement is not only complex, but each state has its own set of regulations. It is important for the buyer and seller to consult a real estate agent or attorney to understand the implications of the transaction.