As home prices continue to grow, it’s becoming more and more difficult to finance a house purchase. Traditionally, in order to afford a mortgage you need a good credit score and cash to pay for the down payment. What happens when that’s not an option? Well, there is an alternative route to homeownership. A rent-to-own agreement allows you to rent a home for a set amount of time, and gives you the option to buy it.
What is a rent-to-own agreement?
A rent-to-own agreement consists of two parts. The first is the familiar lease contract. The second is the option to purchase the home you’ll be initially renting, which can be structured in several ways. Before we get into the nuances of the rent-to-own agreement, let’s first figure out what the prerequisites are.
What comes prior to the rent-to-own agreement?
Initially, you will need to pay a one-time fee called “option money” or “option consideration” if you want to rent-to-own your home. This option fee is usually non-refundable and is paid upfront. However, this is the fee that gives you the opportunity to purchase the home you’ll be renting sometime in the future before the end of your rent lease. Option consideration does not have a standard rate, but usually runs somewhere between 2.5% to 7% of the full home price.
You will need to specify in your rent-to-own contract whether the option fee money can be applied towards the final home purchase. In some cases, the entire fee can be part of the purchase price, in others only some of the money is considered. It also could be that none of the money goes towards your final purchase price at closing.
Make sure to also ask about your rent payments and how they apply to the purchase of the home. You’ll need to specify whether or not the rent payments or a percentage of them will cover any part of the eventual house purchase. This is called building rent credit and it can build up towards the final closing deal with a rent-to-own property.
Lease Option vs. Lease Purchase
There are two ways in which you can rent-to-buy your home. One of these options is more flexible than the other, and it’s called the Lease Option. The Lease Option gives you the right to buy the home you’re occupying when your lease comes to an end, but you aren’t actually required to purchase it. So if by the end of the lease you decide that you don’t want to buy the house, your lease will simply expire. If at the end of the lease you choose to proceed with the original agreement and buy the house, you will need to obtain financing. If you decide against buying or you’re unable to finance the purchase, you will move out as you would from any other rental property. You might not get your option fee back, but unless your contract specified otherwise, you will not have to invest into the house after your lease is over.
The other possible path to buying a house is the lease-purchase contract. This legal agreement may bind you to buying the home you’re occupying at the end of the lease, no matter the circumstances. This means, even if you can’t afford the property at the end of your lease, you are obligated to invest in it.
Repairs and Maintenance
Maintenance may not be as simple as when you rent an apartment. In a traditional rent relationship, maintenance and repairs are typically the landlord’s responsibilities. That may not be the case in your rent-to-own agreement. Make sure that your contract clarifies who is responsible for what part of repairs, maintenance, and HOA (if you live in a condo or a single-family home community). It could very well be, that you are going to have to mow the lawn and the call the handyman if the dishwasher gets broken. Depending on the terms of the contract, you may be responsible for maintaining the property and paying for repairs, so before you sign on the line, carefully read the fine print.
Rent-to-own agreements may vary in their terms, but overall they can be a great option for people would like to buy a home, but are not financially able to yet. These contracts give you the opportunity to build wealth as a renter and save money for a down payment while reserving the house you’d like to buy one day for you.