What are rent to own homes?
Rent to own homes can serve as attainable options if you are not financially prepared to purchase a residence yet. In a rent to own contract, you will be signing an agreement that will allow you to secure a home by paying rent until you are able to purchase the home yourself. In short, you sign a contract to rent a home with a prospect for purchasing it. Thus, you will have the option to buy the house at the end of your lease.
If you are unable to secure a mortgage through Federal Housing Administration (FHA) loans or other housing programs, a rent to buy agreement may be an alternative way to acquire a home. Depending on the type of contract you sign, the conditions of your lease may differ. Therefore, you must negotiate certain aspects of your agreement, including:
• The time period for the lease.
• When the house will be available for purchase.
• How much of your rent payments during the lease will go towards your down payment.
• The factors used to determine the final purchase price of the home.
As a buyer/renter, you will either sign a lease purchase agreement or a lease option agreement. As such, it is imperative that you know the differences between these two types of agreements. Generally, the type of contract you sign can have a huge impact on your options as a prospective homeowner.
Lease Option Agreement vs Lease Purchase Agreement
Before signing for rent to buy houses, all homebuyers should be aware of the details in their lease agreement. One of the most important factors to consider is whether the contract is a “lease purchase” or a “lease option” agreement. These conditions are typically determined while negotiating a contract, so potential homeowners should know which type of agreement best suits their financial and housing needs. With adequate preparation and understanding of leases, renters can be more comfortable when making decisions about rent to own homes.
What is a lease option agreement?
If you sign a lease with the option to buy, you will usually be responsible for a one-time payment at the beginning of your lease. This payment is usually a small percentage of the purchase price of the home, and is referred to as “option money.” After paying this sum, you will be given the right to purchase the home whenever your lease expires. However, with a lease option agreement, you are not obligated to buy the residence after your lease ends. On the other hand, if you choose to walk away from the property, you will not receive a refund from your “option money” payment.
What is a lease purchase agreement?
Lease purchase agreements are generally less ideal for most prospective buyers, because they are not as flexible as lease option agreements. While these contracts do not require significant upfront payments such as “option money,” they have very rigid guidelines that are established when the contract is negotiated. For example, a lease purchase agreement will usually have a preset date of purchase and property price, or a date when the home will be appraised for a final sale price. Furthermore, at the end of this lease, renters will be legally obligated to purchase the residence.
Note: To avoid any misunderstandings, you should always review a rent to own contract with a qualified real estate attorney.
Eligibility Requirements for Lease to Own Homes
While there are no specific eligibility requirements to sign a rent to own agreement, there are certain candidates that may be more ideal for this option. For instance, renters who wish to become homeowners but are not financially established for the purchase can sign a rent to own contract to secure a home that they intend to buy in the future. Additionally, this option can be attractive for residents who cannot secure a mortgage in a high-cost urban market. As such, these candidates can use their time under a lease agreement to secure a better mortgage option for when they are ready to purchase the property.
As an example, military service members may become eligible for a VA loan from the Department of Veterans Affairs while residing on rent to own homes. Moreover, certain first-time homebuyers may qualify for incentives offered by Fannie Mae.
How to Apply for a Rent to Own Agreement
The process to sign enter a rent to own agreement is very similar to purchasing a home. You will usually require a real estate agent to help you negotiate terms with the owner/seller of the residence. Furthermore, you should do the following before signing a rent to own contract:
- Choose terms that work for you.
- Get help from a qualified real estate agent.
- Research the terms of the contract with your agent.
- Research the property and its seller.
How can rent to buy homes benefit you?
There are many benefits of rent to own homes that may make them a valuable option in certain circumstances. For one, these agreements will give you time to get your financial situation in order by improving your credit score and saving money without having to worry about losing the house you chose. If you have bad credit, a rent to own agreement can provide you with a place to live and a timetable to improve your credit score before deciding whether or not to purchase the home. You can also negotiate various conditions of your contract, such as the residence’s price, rent payments and who is responsible for home maintenance.