Guide to Obtaining a Rent-To-Own Home

A rent-to-own property provides potential buyers with many advantages, especially if the potential buyer is not found eligible for a mortgage because of a low credit score or no down payment. When a potential buyer rents to own a home, it lowers the total buying price of a home over time, sets a locked-in price and can help potential buyers in bettering their credit score while on contract.

Even though renting to own a property provides many advantages, it also brings its disadvantages. Some of these can include price inflation because of the fall in market value. The possible loss of payments made towards buying a home and predatory homeowner are also disadvantages of this. By creating an understanding of about rent-to-own homes, the advantages and disadvantages of renting a home, you will be able to find out whether rent-to-own is an option for you.

Significance of Rent to Own

Renting to own a property means that the renter rents a home that has the chance of being bought in the future. The renter will determine if he or she will purchase the home at the end of the contract period. 

While the renter is abiding by the contract, the renter will make reoccurring payments to the current owner of the home with a portion going towards the purchase of the home. When the time comes to buy the home, the home will have reduced prices from all the payments.

Contract Periods for Rent-to-Own Properties

Contracts for rent-to-own properties will typically last for two to five years. During the contract period, the renter will pay a negotiated amount every month. This amount will have the part of rent, so the property can be used, and the other part will be put towards buying the home. This will occur if the renter decides to buy at the end of the contract period. 

Advantages to Rent-to-Own Properties

Rent-to-own homes can provide many advantages to potential homebuyers who want to buy the property after the contract period ends. The benefits can be useful to buyers who are not eligible for a traditional mortgage or to buyers whose down payments are not large enough to be provided a mortgage loan.

Improving Your Credit Score

If you are still not eligible for a mortgage loan, renting to own a home can help you better your credit score. Your credit score is important since both your credit score and credit history are the main factors for deciding your eligibility for a mortgage when the contract finishes. 

Additionally, your rent-to-own contract can increase the chance of getting a mortgage through the private lender. The reason for this is because you have already allocated money meant for purchasing the home. 

Save Money on Down Payments

The majority of traditional mortgage loans will need you to give a minimum of 10 percent down payment to buy a home. While rent-to-own homes typically involve paying a down payment, the down payment price is usually very reduced from the price a private lender may demand. In addition to saving your money on the principal down payment, a part of the rent every month will be allocated to the purchase price of the property. 

Making the Purchase Price for a Home Fixed

When you are creating the contract for the rent-to-own property, the contact must have the purchase price of that property. This price is negotiated between you are the current owner of the home. Fixing the price of the property will keep the price from going up, even if the market value of the house increases.

Trying Out a Property Before Purchase

When you rent to own a property, it can provide the unique experience of trying out a house before buying. Residing within the property before owning it allows you to form an opinion on the house before making a commitment to buying the property. You can experience living in your desired property for a period of time and decide whether you can handle any issues that arise. 

Disadvantages of Rent-to-Own Homes

Although rent-to-own homes can provide many advantages to potential homebuyers, the rent-to-own properties also have drawbacks. Understanding the drawback of these types of properties can help make a more informed decision before signing that contract.

You May Lose Your Down Payment

Once you are renting to purchase a property, you can minimize the total price of the home using a part of your monthly payments. But if you choose to not buy the property when the contract term has ended, the money you have already invested into buying the home will be forfeited.

Predatory Homeowners

If you are trying to buy the home that you are renting, it is important to read your agreement for purchasing your home carefully before making agreements or signing the contract. Predatory homeowners and lenders can make the buying process very challenging for you. Additionally, when a deal appears to be too good to true, it may be because it is. It is highly recommended that an attorney review the contract before you sign. 

Incapacity to Be Eligible for a Loan

When your contract ends, you will have to pay a larger amount of money for the rent than for the purchase of the home. The money going towards buying the home may not cover the entire purchase price of the home. Often times, you would have to become eligible for a mortgage to pay off the home. You will have to forfeit the money you have paid already if you are not eligible for the mortgage. 

Purchase Price is Locked In

Having a fixed price on your rent-to-own home can be advantageous. However, there is a downside to this locked-in price. When the market value of the home lowers, you will still have to pay the originally agreed-upon price. 

Alternatives to Rent-to-Own Properties

If you want a rent-to-own home because you are not eligible for a mortgage, learning about the federal programs available can help you qualify for a mortgage even if your credit is poor. For instance, an FHA loan is administered by the Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). 

The way the FHA works is that it does not give the mortgages to the borrower. Instead, the loan program will insure the loan from an approved lender. The lender will provide better terms for the borrower as a result. 

It is possible to be eligible for an FHA loan if you have a credit score of 500. But with a credit score this low, you will have to place a 10 percent down payment of the purchase price. With a credit score of 580 or over, you can place a reduce down payment of 3.5 percent.