Rent-To-Own Homes: All the Details

Rent-To-Own plans are becoming increasingly popular due to the advantages they offer. These plans, often considered all-encompassing, operate in a variety of ways. For example, owners and sellers can enter a rent-to-own agreement that will last until the rent or lease is fully paid. Since certain people may not be able to buy a property due to credit issues or certain financial situations, they may purposely seek out a rent-to-own option.

Rent-To-Own: How it Works

In most cases, rent-to-own agreements require a tenant to rent a house for a certain period of time, such as 12 months. Once the term is up, the renters are allowed to decide if they wish to purchase the home. Any rent paid during the previous period can be applied as a credit to the price of the home. Some owners may choose to apply the credit to closing costs as well but each scenario is different.

Agreements involve a predetermined price. Landlords may require a certain amount down, usually around 3 percent, for this scenario. At the end of the lease, the tenant is held to the specified purchase price. While the agreement is in effect, the homeowner cannot let anyone else purchase the property.

Benefits of Rent-To-Own Arrangements

If people have issues with their credit, a rent-to-own can be especially beneficial in purchasing a home. This type of arrangement can also be helpful for people that struggle coming up with a 20 percent down payment. In either of these scenarios, obtaining a traditional mortgage can be quite difficult. Also, if a homeowner experienced a foreclosure or failed to make mortgage payments in a timely manner, a bank may refuse to work with them for another 7 to 10 years.

Pros And Cons of Rent-To-Own Agreements

Engaging in a rent-to-own agreement has advantages and disadvantages. Certain people find this option appealing since it offers them a way to be placed in areas with better school districts. In other cases, people may desire a home in a downtown area with few housing choices. Other people view rent-to-own agreements as a chance to avoid the commitment of a 30-year mortgage.

One of the biggest advantages for buyers is that the sale price of their desired home is locked in place. Tenants can reside in a home for an extended length of time before making a decision on whether or not they want to buy it. At times, people may move into a new house and end up disliking the neighbors, the actual house, or the neighborhood. If these residents were locked into a 30-year mortgage, walking away would not be easy. Alternatively, a rent-to-own contract allows the tenant to leave on their own terms or stay if they wish to.

One drawback is that rent-to-own agreements often have higher payments due to the benefits of the arrangement. A portion of the higher payment helps cover the purchase price. The tenant will have to forfeit this extra money is they choose to cancel the deal. The majority of agreements also require tenants to cover the cost of maintenance, necessary upgrades, and back taxes. For land contract agreements filed through a court, a renter will be evicted if they fail to make the required payments. This will also show up as a foreclosure on their record.

Is Rent-To-Own a Good Option?

Although a rent-to-own arrangement can work perfectly for some, it can end up being a hassle for others. It can be an excellent option for people facing limited housing options in a desired area or for people struggling with credit issues.

Generally, most real estate professionals are not advocates of rent-to-own agreements. For people who are disciplined in their financial matters, these deals will not suit them since they can afford to buy the property they want. Even certain realtors agree that these arrangements involve risks for both the seller and the tenants.

If an arrangement is the only option due to a buyer's financial situation, it is generally suggested to do a lease with an option. This scenario allows the tenant to continue renting or living in the home if they cannot afford the mortgage at the end of their term.

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