Rent to Own Can Help You Buy a Home

If you think that owning a home is not possible right now, it’s time to look into the possibilities offered by a rent to own arrangement. By understanding how the process works and what type of commitment you are taking on, it’s easier to decide if this is the right course of action. Here are a few things you need to know about how a rent to own strategy can help you become a homeowner.

How It Works

One of the first things you need to understand is how a rent to own approach to buying a house works. Keep in mind that some of the specifics will vary based on laws that apply in your jurisdiction.

As the potential buyer, you enter into what is basically a lease and agree to pay a reasonable down payment plus make specified rental payments to the property owner for an agreed upon amount of time. Depending on the arrangement you make with the owner, this can be anywhere from a year to three years. At the end of that agreed upon term, you have the option of purchasing the home. Some or all of the monthly rental payments you’ve made are applied to the final purchase price.

Why Not Get a Mortgage?

The typical approach to buying a residential property involves securing a mortgage. That’s fine if your credit is in great condition. People who have been through some sort of unfortunate financial situation may have a less than perfect credit rating. This limits the options for obtaining a mortgage and guarantees they will pay a higher rate of interest on any mortgage offers they do receive.

The beauty of a rent to own arrangement is the owner is likely to be more concerned with how well you are doing financially at present. If you have enough income coming in to pay your present bills and manage the rental payment, there is a good chance of being approved. The risk to the owner is limited because the agreement terms do allow the owner to retain legal title to the property until you indicate that you want to move forward with the purchase.

During that one to three year period specified in the contract, you have the chance to improve your credit rating. In the best-case scenario, your credit score will be high enough to allow obtain financing with terms you can afford.

Fees and Credits

A rent to own agreement typically includes a fee that is known as option money. This is different from the deposit in that the option money is not refundable. Should you decide not to pursue the purchase of the property at the end of the term, the property owner keeps the option money.

If only a portion of the rent money you pay each month is going toward the potential purchase, that portion is known as a rent credit. Over the life of the lease, your rent credit builds up and helps to serve as a down payment on the home if you do exercise the option to buy. Keep in mind that if you choose to not purchase the home, you forfeit any rent credit. The only thing that the owner will return to you is your initial rental deposit, assuming that nothing other than normal wear and tear to the home took place during your tenancy.

How About Maintenance, Taxes, and Insurance?

Expect to assume a little more of the property maintenance as part of the arrangement. The details will be spelled out in the agreement. For example, you may assume responsibility for maintaining the landscape and taking care of any minor upkeep like painting the interior walls or having the carpets steam cleaned. During the term, the present owner may still remain responsible for major repairs like replacing the HVAC system or installing a new roof.

The property owner will continue to maintain a home insurance policy. For your part, the agreement terms may require that you secure tenant insurance to cover your belongings and provide liability coverage if someone should be injured while you are living in the home.

Property taxes are also likely to remain the responsibility of the owner. You will assume responsibility for those taxes when you do exercise the option to buy.

While your credit may not be ideal and there is not money for a down payment right now, that does not mean you can’t find a home that will eventually be yours. Check into rent to own options in your area. Look closely at how much money you will need to supply up front, the portion of your monthly rental payment that will be set aside as rent credit, and how many years you will have to improve your credit and save more money for a down payment. You may find this approach is just what you need to move into the house you’ve always wanted.