How Does Rent-to-Own Work When Buying a House?

Rent-to-own, or lease-option arrangements occur when a seller gives you the right to purchase a property at a set price after renting for a fixed time period. If you aren't quite ready to buy a home, renting to own is often a viable alternative. Renting to own provides the option of preparing your credit history and finances to purchase a home while living in the home.

Down Payment

The cost of renting is usually significantly less than the cost to purchase a home. When seeking approval on a home loan, a down payment is required in an amount usually ranging between 5 to 20 percent of the purchase price. Sellers offering rent-to-buy properties understand that not all renters have substantial cash savings to apply toward the purchase of a home. Instead of requiring a lump-sum down payment, a seller may request that you pay the down payment over the course of your lease by adding an additional amount onto your rent each month.

Terms

Rent-to-own terms vary based on the needs of the seller and buyer. However, rent-to-own usually locks the buyer/renter into exercising the option to purchase the home before the end of the lease term. Failure to meet your end of the bargain could mean losing the opportunity to buy the home and any money put toward the down payment. Review the lease agreement to determine the specific time frame you have to exercise your option.

Financing

With a rent-to-own, you must purchase the home in full at the end of your lease term by obtaining a conventional bank loan. Consult with a lender prior to signing a rent-to-own agreement to ensure you will be ready to buy at the end of your lease. Many borrowers find that their financial circumstances lead to rejection when seeking a loan at the end of a rent-to-own term. A lender can assess your current financial circumstances and offer advice on how to improve your chances of getting your loan approved. Rather than assume, it is much better to have a fixed checklist of items to change about your financial circumstances so that you can avoid losing your home.

When to Rent to Own?

Renting to own is a viable option when you can easily correct problems that could result in denial of a loan. For example, if you are denied a mortgage loan because your debt-to-income ratio was too high due to credit card balances that can be repaid within a year, or have too many recent late payments on your credit report, rent-to-own may work for you. Also, if property values are rising in an area, renting to own your home can be profitable since you can lock in a purchase price at the beginning of your lease term.

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