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Homeownership opens the door for stability, community and long-term financial growth over time, but unfortunately, not everyone is in the perfect position to buy their first house. In a competitive market, mortgage complications and rising sales prices can immediately throw a wrench in buying plans.
But then, there's rent-to-own (known in some instances as lease-to-own.)
Rent-to-own options create a work-around that lets potential home buyers start renting the home of their dreams until they are in a better financial situation to buy it back. It seems like the perfect setup, especially for those who are tired of sinking money into monthly rental payments, but there are a few factors future home buyers should consider before walking down this road.
First, how does rent-to-own work?
In most scenarios, renters can enter a rent-to-own program if they check off a few financial pre-requisites that are lower than the qualifications for getting a mortgage. Once in the program, renters can go shopping with an agent to find a home in their budget, which will be purchased for them to rent until they are financially ready to make the down payment to buy the home back.
The rent-to-own program makes money from monthly rent payments, and many companies will save a portion of your rental payments to give back to you towards a down payment at the end of your contract.
Programs vary on the length of time that renters are allowed to live in the space before buying, with most having options to leave at any point if the home doesn't work out. The typical time frame is 1-5 years.
Second, who is the best choice for rent-to-own?
It's easy to feel nervous about buying a home, but that's not the best reason to take the plunge and sign up to rent the home first. While having the option to "try out" a property first is appealing to get rid of those home buyer jitters, here is how to tell if you are the ideal candidate for rent-to-own:
- You need more time to sort out your finances. Many rent-to-own programs don't look as deeply at your financial history as loan officers. If you just started a new job, or have inconsistencies from self-employment, rent-to-own is a great opportunity to work on documenting your income for a mortgage.
- Your credit score needs a little bit of work. If your credit score isn't quite where it needs to be to get a mortgage, many rent-to-own programs have lower requirements. This is a good option for you to spend time getting your FICO up towards mortgage eligibility.
- You're relocating to the area but unsure of the location. If you are in a good place financially to get a mortgage, but you just relocated to a new city and want to "test-drive" a home in a specific neighborhood, rent-to-own can be a great option. If you do decide to purchase the home, you also cut back on the number of times you have to move.
Third, what are you signing exactly?
Rent-to-own programs vary when it comes to contracts and not all are created equal. The two most common are lease-options and lease-purchase. Here's how it works.
- Lease-Option Contracts: If you want the option to purchase down the road, but do not want to feel obligated or trapped into buying the home, then you should look for a lease-option. With this safer contract, you can walk away without facing consequences if you decide the home is not the best fit for you.
- Lease-Purchase Contracts: With many lease-purchase contracts, you can't get out of the deal if things go south. This traps you in a home, and you may be forced to buy it at the end of your lease period, even if you can't afford the house.
Always read the fine print and see what the landlord in your rent-to-own program is covering and what they don't. Find out if you are responsible for things like repairs, property taxes and maintenance and closing fees and see what repercussions are in place if you missed a payment.
Finally, how will this help you save for your down payment?
The last factor to assess when exploring a rent-to-own program is how much you will pay every month compared to renting. If your goal is to save up for a down payment, you need to be putting back money in savings every month, which can be difficult if your rent payments are a lot more.
Fortunately, many rent-to-own programs will save a portion of your rent every month to give back to you towards a down payment once you decide to buy the home. Carefully examine your contract to see how much your rental payments will be, the amount your landlord will put back for you, and what that will add up to if you decided to stay in the property for several years before buying. Compare that with what you would pay for rent typically, and also consider the money you will save by reducing the number of times you have to move and paying a fixed rental rate.
Conclusion, work with a rent-to-own expert.
All of these rent-to-own factors can be overwhelming, but many first-time home buyers have found great success by "test driving" a home before committing to buying it.
At Better Homes and Gardens Real Estate Metro Brokers, our experienced agents are educated about the best rent-to-own options so you can rent less and own more every month. If you feel like this is the best choice for your financial situation, work with an expert who can walk you through the contract and tell you exactly what steps you need to take to attain your long-term goal of home ownership.