(ProsperNews.net) – The unpredictable housing market makes it challenging for Americans who want to own a home. Most homebuyers often opt for mortgages, but you may use this option if you don’t have a good credit score. Moreover, renting doesn’t build equity, especially if you want to be a homeowner. However, there’s an alternative option: rent-to-own agreements, where you rent a home for a while with the option of purchasing it when the lease ends. Here’s what you should know about rent-to-own arrangements and how they make homeownership more attainable.
What’s a Rent-to-Own Agreement?
A rent-to-own home agreement is a contract that allows you to purchase a home after a few years of renting the house. In the agreement, your rent usually exceeds the fair market value. At the end of the lease period, this extra money becomes your down payment. You may or may not have to pay an option fee of 2% to 7% of the home’s value to keep the option of buying the house. In addition, you will lose your additional payments if you don’t purchase the property at the end of the lease.
How Does a Rent-to-Own Agreement Work?
Renting-to-own involves renting a house while working towards owning it if you decide to buy it after your lease expires. In the agreement, every month, a part of your rent goes to the down payment on the property. This means you make part of your down payments through your rent checks. You can buy the house at the end of the lease period, usually at the price you agreed upon in advance.
Types of Rent-to-Own Agreements
There are two main types of rent-to-own agreements that you’ll hear when you want to get into such an agreement.
Lease-Option Agreement
In a lease-option contract, the homeowner pays an option fee, which is typically a cost of the total purchase price. The extra rent payments you make over the lease period go toward your down payment if you purchase the house. You can work with the seller to agree on a favorable price, which usually requires an appraisal to determine the property’s value. A lease-option agreement doesn’t obligate the homeowner to buy the property but obligates the seller to sell it when the lease contract ends. However, if you don’t buy the house, you lose the option fee and the rent payments you made.
Lease-Purchase Agreement
This contract works similarly to a lease-option agreement, where you will still lease the house for a certain period and put a part of your rent toward a down payment to purchase the home. However, the primary difference is that in a lease-purchase agreement, you must buy the home at the end of the lease. You have to be careful with this option because if you can’t buy the home, you will lose your rent payments and option fee, and the owner can sue you.
How Rent-to-Own Agreements Make Homeownership Attainable
Renting-to-own allows homeowners to build equity in a home without taking a mortgage or paying a large down payment. This is beneficial if you don’t have the financial means to buy a house or don’t qualify for a mortgage. It’s an excellent way to save money for a down payment while testing the home to see if you like it.
Additionally, you can save on repair costs as most rent-to-own agreements allow landlords and tenants to share maintenance responsibilities. This can help you afford the house if you want to buy it but don’t have enough money to cover high maintenance costs.
Renting-to-own allows you to buy or move out through the lease-option and lease-purchase contracts. After the lease period ends, you have two options depending on the contract you took; you can buy the house if you like it or move out.
A rent-to-own agreement is an excellent option because it allows homeowners to start living in the house and testing it immediately while saving to buy it in the future. Homeowners can also change their minds if they don’t love the house and lose their rent payments.
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