Rent-to-own can be a great alternative if you can’t afford to buy a home outright, have a low credit score or don’t have enough money for a down payment. Rent-to-own contracts can also give you the chance to see how you like a home and neighborhood without committing to buying it. Read on to better understand what rent-to-own means, how the process works and what you should know if you’re interested.
What does rent-to-own mean?
Simply put, rent-to-own is where you rent a home for a certain period of time before you buy it. Depending on the terms of the contract, that period can range from several months to several years. These contracts are different than a traditional renter’s lease or purchase contract.
As part of your rent-to-own contract, the seller agrees to put a certain amount of money from your monthly rent payment toward your equity in the home.
There are two kinds of rent-to-own contracts: lease-purchase and lease option. With a lease option contract, you have the option to purchase the home after a time period you and the property owner have agreed upon. With a lease-purchase contract, you’re legally obligated to buy the home at the end of that period.
The rent-to-own basics
There’s no one-size-fits-all approach with the rent-to-own process. However, rent-to-own transactions typically have several standard components, including:
- Purchase price: A rent-to-own contract typically specifies the home’s purchase price. In some cases, the purchase price won’t be determined until the lease expires.
- Rent payments: The contract will specify the amount of rent you’ll pay each month. Rent prices in a rent-to-own contract are usually higher than regular rental fees since the owner sets aside a portion of your monthly payment for use towards your future purchase of the home.
- Maintenance: The contract notes who is responsible for covering maintenance—you or the property owner. Make sure you understand what you’re agreeing to repair if maintenance is necessary.
- Option fee: As part of a rent-to-own contract, you may be required to pay a one-time, non-refundable fee. This fee is usually a percentage of the purchase price, although there is no standard amount.
- Lease term: The contract will also specify the terms of the lease and how long you’ll be renting before moving forward with a purchase.
- Closing process: You’ll need to obtain financing at the end of the lease if you want to purchase the home. The money set aside from your rent payments may be credited to you at this point. Lenders may have guidelines that limit how much can actually be credited, such as only permitting the amount you can document was paid above market rent.
Advantages and disadvantages of rent-to-own contracts
Rent-to-own listings aren’t as common …….