Rent to own homes provide prospective homebuyers numerous potential benefits. This process of purchasing a home can be especially attractive if the homebuyer cannot currently qualify for a mortgage, has a low credit score or lacks the appropriate income needed for an approval.
“Rent to own” refers to a unique home buying process that allows prospective buyers to live within a home for a specific amount of time while making rental payments. A portion of the rent is set aside to use towards the home’s purchase.
At the end of the rental period, the tenant will have the option of purchasing the home at the agreed-upon price, reduced by applied credits for a portion of rent payments each month and any initial down payments.
By learning more about this unique process of purchasing a home, you will be better prepared for the process as well as know what to expect in terms of benefits and potential drawbacks. Additionally, you will gain a better understanding of alternatives that may be available to you to make an informed decision.
1. Explore the Benefits of Rent to Own Buildings
If considering a rent to own contract, it is worth taking the time to review the potential benefits that you might experience compared to traditional methods of purchasing a home.
Renting to own can provide you with benefits such as:
- The chance to increase your credit score and reduce your debt to income ratio to potentially qualify for a mortgage at the end of the rental agreement.
- Reduced down payment requirements, as rent to own properties typically require far less than that of a traditional mortgage.
- The ability to lock in the purchase price of the home, which will not increase, even if the value of the home increases.
- The chance to “test drive” a property before agreeing to buy, thus allowing you to ensure that you enjoy living within the home and that you do not run into any unexpected problems.
2. Learn More About the Potential Drawbacks of Rent to Own Homes
Rent to own homes can provide several benefits to prospective homeowners, but these properties also include potential drawbacks. By being aware of these potential drawbacks, you will be better positioned to make an informed decision.
If you intend to rent to own, you may face potential drawbacks such as:
- The potential loss of any down payment, also referred to as “purchase option”, should you choose not to purchase the home at the end of the rental period.
- Predatory homeowners, which can make it difficult for you to follow through on your desire to purchase a home at the end of the contract period.
- The inability to qualify for a mortgage at the end of the contract period, thus forfeiting any amount that you have paid towards the purchase of the home.
- A locked in purchase price, even if the market value of the home has been reduced since your rental contract began.
3. Find Rent to Own Homes Listings
If you are wondering, “How can I find rent to own homes near me?” then it is important to explore local advertisements that may be available within your community as well as online listings from reputable sites. You may also find opportunities on websites like craigslist.com.
However, it is important that you always verify all of the information that you read online in order to avoid common scams.
If a contract ever sounds too good to be true, or if you are ever asked to send money to a homeowner and they will “send you the keys” — it is crucial that you walk away from such contracts.
4. Go Over Your Rent to Own Contract Before Signing Anything
Your rent to own contract should detail every part of the agreement between you and the homeowner. This should include terms related to:
- Down payment or “purchase option” fees and requirements.
- The length of the rental period.
- The monthly rent during the rental period, including what percentage will go towards the purchase of the home.
- Whether you or the homeowner are responsible for property taxes and repairs.
- Rules that you must follow until you purchase the home.
- The purchase price of the home.
Contracts typically include a rental period that will last between two and five years. It is crucial that you review your contract carefully before agreeing to it. If possible, you can protect yourself and your investment further by having a lawyer familiar with real estate review your contract before you sign.
5. Explore Alternatives to Rent to Own Properties
Rent to own homes present a unique opportunity to work towards the purchase of a home, but there is no guarantee that you will be able to purchase the home at the end of the rental period. Therefore, renting to own a property can include considerable risk and could potentially result in a financial loss.
If you are considering a rent to own contract, because you are struggling to qualify for a traditional mortgage, then it is worth reviewing the alternative options that may be available to you. Alternative options may include federal programs like the FHA loan program.
FHA-insured mortgages provide low-income households and those with poor credit scores the opportunity to become homeowners while promoting homeownership. Through this program, the Federal Housing Administration (FHA) insures a borrower’s mortgage to reduce eligibility requirements for obtaining a mortgage with an approved lender. Through this program, borrowers can qualify with a credit score as low as 500.
FHA loans, as well as other federal loan programs, can reduce borrowers down payment expectations. Most FHA loans (credit score of 580 and above) reduce down payment requirements to just 3 percent. Other mortgage insurance programs, such as USDA and VA loans, can eliminate down payment requirements entirely.
Therefore, it is important to explore alternatives to rent to own homes to review all of your options and make an informed decision on the purchase of a home.