If you are like most home buyers, you will need a home loan to finance your home purchase. To qualify for a home loan, you must have a good credit score and cash for the down payment. Without this, the traditional route to homeownership is not an option for you.
However, there is an alternative called, Rent to Own, in which you rent a house for a certain period of time, with the option to purchase it before the lease expires. Let’s go over how rent-to-own works and whether it is a good option for you or not.
What is Rent-to-Own?
Rent-to-Own is an alternative route to homeownership which involves crediting a portion of your monthly payments towards the down payment on the property. The renter must pay higher rent to accrue down payment during the time of the lease.
In a typical rent-to-own agreement, the renter and the property owner agree on the amount of monthly payments, the rental period, and the final sale price of the home. This way, the buyer is able to “lock-in” the property in advance and gets the first right to purchase the property. For a right person under the right circumstances, a rent-to-own agreement can make a lot of sense, but it has its own setbacks where it becomes less than ideal.
Rent-to-Own agreements are typically of two types
A lease-option contract is similar to a traditional renting agreement, except you will pay an additional amount every month which will contribute towards the down payment for the house. Naturally, the rental charges will be higher than the similar rent-only properties in the area.
After the agreed upon period of time, the renter gets the right to purchase the property. However, remember that this is only an option and the renter is not obligated to purchase the property.
A lease-purchase contract works similarly like a lease-option agreement where you pay the rent to the property owner with an additional sum every month which contributes towards the down payment. However, the difference between the lease purchase and lease-option contract is that instead of having an option to purchase the property at the end of the lease, the renter is obligated to do so. The seller may even have the right to take a legal action against the renter if he is unable to afford it or changes his mind.
Why Choose Rent-to-Own?
Rent-to-own is a reasonable option for homebuyer who are not quite financially ready to purchase a home. If you have found a house that you really like and want to purchase it, but still need time to build your credit score or accrue money for a down payment, a rent-to-own might be a practical solution for you.
A rent-to-own allows you to lock the purchase price in advance, which is ideal if the house prices in the neighborhood are continuously rising. It also allows you to move into your new home immediately without having to wait for the mortgage processing.
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