When Are Rent To Own Homes A Good Idea?

Most people dream of owning their own home and having a space to live in long-term. Those who are not ready for the commitment or don't qualify for a mortgage can consider a rent-to-own agreement. There are a number of reasons that you may not qualify for a loan, which can include a low credit score that is below 620, which is the lowest that lenders accept to approve loans.

The circumstances that depleted the score may be in the past and you may already be working towards a higher score. You may even have a debt-to-income ratio that is too high, but you're still able to afford to pay off the remaining balances. You may also have a stable job or earn a high salary, but haven't been employed for one or two years at a time to reassure lenders that you have a stable income. You may even be self-employed but haven't been working for yourself long enough to offer lenders peace of mind to take on a mortgage. Some people may have money saved but haven't reached 20 percent to put down on a home.

If you resonate with any of these situations, renting to own a home may be the best option to ensure that you can continue making progress towards owning your own property. You can immediately lock down a property that you like and avoid moving for a second time when you qualify for a mortgage. This will allow you to take the next few years to clean up your FICO score, contribute more to your savings, and lengthen your employment history to become a stronger candidate for a home loan. You can even start building equity if a percentage of your rent is used towards the value of the home.

To take advantage of a rent-to-own situation, potential buyers should be confident that they'll be ready to purchase the home when the lease ends. If you're considering moving again or are unsure of your financial future, avoid a rent-to-own agreement, which will require you to pay additional option money. You'll also be responsible for rent credits for two to 36 months, which is nonrefundable. This could add up to a substantial amount of money that can be considered a waste if you return to renting. You may also have a difficult time asking the landlord to refund your rent credit and option fee in full if you're thinking of moving again in a few years.

Pros and Cons of Rent-to-Own Contracts

Homeowners who own a home that sits on the market for too long can consider a rent-to-own option to avoid lowering the price of the property, taking it off of the market or renting it out over time. The selling price will be listed in the lease-option contract, which allows the homeowner to know what the expect if the sale isn't completed. The sale price will be secure despite the market conditions and the tenant will want to purchase the home because they've already made an investment on the property. This allows the homeowner to obtain assistance with paying off of the mortgage each month while also covering the cost of homeowners insurance and taxes. The tenants are also likely to avoid thrashing the property because they're considering purchasing the home.

One of the main reasons that a rent-to-own agreement is favorable for a portion of buyers who are looking to purchase a home is because they don't have to come up with a down payment or apply for a home loan. The buyer is also not responsible for additional costs on the home, which often includes insurance or taxes. The buyer will also be capable of locking in the current price of the house, which will make it easy to avoid worrying about the state of the real estate market. To protect themselves, owners can even add a section in the contract that allows the price of the home to increase if the market improves in future years. Buyers will also have the advantage of testing out the home to determine if they enjoy living in it before they decide to buy the property and make a financial commitment.

The downside of rent-to-own options is that the process is not as regulated in the industry, which provides property owners with more freedom during the negotiation process if the home is purchased. This provides owners with the opportunity to take advantage of unsuspecting buyers who are new to the process. Unfortunately, rent-to-own deals often fall through because some owners never have the intention of actually selling their home and agree to the contract, which allows them to collect rent and the initial deposit. The contract may also become void if the owner receives a late payment. In one case, a landlord in Florida tried to negotiate the contracts that allowed for evictions due to late payments and only gave three days notice.

In the real estate industry, there is not a lot that is considered to be standard with the contracts, which makes it important for renters to know what they're agreeing to before signing the document. Currently, only some states will allow you to live in rent-to-own residential properties, making it important to conduct plenty of research. Although you may have a real estate agent or an attorney assist with the process, you'll need to understand the financial and legal aspects of rent-to-own agreements to be considered an ideal candidate for the real estate situation.

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