Having enough for a down payment while having good credit is hard to obtain while throwing away money on rent and not being able to save. That means that you will need to look at other options when trying to buy a home like rent-to-own options.
What is a Rent-to-Own Agreement?This is a type of agreement where the seller and homebuyer agree that at the end of the rental period, the renter can buy the house. Some contracts require an upfront option fee for this option and these typically go towards the closing costs of the house at the end of the rental period. Depending on the contract, rent that you pay during this rental period typically either goes all or partially towards the closing costs as well. However, if you decide to not buy the house then the option fee stays with the homeowner as well as every monthly payment you have given.
Rent-to-own contracts go by other names, including:
- Lease-option agreements
- Lease-to-buy option
- Rent-to-buy option
Questions to Ask About Rent-to-Own Agreements
These types of contracts can potentially be complicated so it is important to know 6 questions to ask to fully understand what you are signing up for!
1. How Do These Work?It is imperative that you understand every single term of the contract you are signing like length of the agreement, option fee price, etc. However, due to the nature of these contracts you will be paying a rent price that is typically above the market, however, just remember that the rent payments can go towards the closing costs of the home, you just need to make sure that is detailed in the contract!
2. Will I Be Ready for A Mortgage?You should talk to a lender about what requirements you will need to meet in order to get approved for a mortgage to buy your house. This should be done before you enter any agreement because you need to have a clear understanding of your future situation. You need to spend the rental period years saving up enough for a down payment as well as improving your credit to get approved for a loan!
3. What’s the Housing Market Like?There are ways of reaching the final price of the home after the rental period for you rent-to-own agreement. You can either lock the home at a fixed rate, or you can get the home appraised at the time of purchasing. The only time you should opt for a fixed rate is during a rising market, however, in every other instance you should get the home appraised at the time of purchasing so you don’t run the risk of overpaying on your home. However, you run the risk of losing a good deal because the market could be in your favor. These are just some of the
4. Who’s responsible for what?You need to have a clear understanding about the tenant and landlord responsibilities during the rental period. You want to know who is responsible for maintenance, property taxes, taking care of the lawn, etc. You want to make sure you know this so that you don’t run into any unexpected costs that can hurt your financial situation!
5. Is a Home Inspection Required?This is still a home purchase so it is extremely important to have a home inspector come to the house and ensure you are making a good decision! Although it may cost a decent amount of money, you ensure saving money in the long ru nso you don’t buy a house that needs lots of repairs!
6. Are There Better Options Available?This type of agreement can be ideal for some homebuyers but not all! You want to make sure that you are capable of making meaningful progress to homeownership if you are going to be in this type of lease. However, if not then you need to be aware of other options like a down payment assistance program, which may be better for your financial situation. Make sure to time on this decision!
OverallIf you want to pursue this contract type just be sure to have a real estate attorney look over the paperwork to ensure that there is nothing wrong with the contract. Have your attorney walk you through every aspect of the contract so that you understand what you are signing up for. You can make the best decision if you fully understand all aspects!