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What is a Rent To Own Home?
A rent-to-own home, also known as a lease-to-own home, is a type of agreement in which a tenant rents a property for a set period of time, with the option to purchase the property at the end of the rental period. During the rental period, the tenant typically pays rent, as well as a portion of the rent that goes towards the eventual purchase of the property. The advantage of a rent-to-own agreement is that it allows the tenant to live in the property while they work on improving their credit score or saving up for a down payment, making it easier for them to qualify for a mortgage in the future.
Why choose rent to own?
There are several reasons why someone might choose a rent-to-own agreement instead of buying a home outright:
- Improving credit score: A rent-to-own agreement can be a good option for someone who has a lower credit score, as the tenant has the opportunity to improve their credit while living in the home.
- Saving for a down payment: The tenant can use the time during the rental period to save up for a down payment, which can make it easier to get approved for a mortgage when the time comes to buy the home.
- Testing out a neighborhood: Rent-to-own allows the tenant to test out a neighborhood and see if they like living there before committing to buying a home in the area.
- Flexibility: Rent-to-own offers more flexibility than a traditional mortgage, as the tenant can choose not to purchase the home at the end of the rental period if they decide it's not the right fit for them.
- Avoiding competition: In a competitive housing market, a rent-to-own agreement can provide a way for the tenant to secure a property before they are able to buy it, potentially avoiding bidding wars and other competitive situations.
It's important to carefully review and understand the terms of a rent-to-own agreement, as there may be drawbacks and potential risks involved.
How does rent to own work?
A rent-to-own agreement typically works as follows:
- Rent and Option Fee: The tenant pays rent each month, as well as an option fee, which is a one-time payment that gives the tenant the option to purchase the property at the end of the rental period. The option fee is often a percentage of the eventual purchase price and is applied towards the purchase if the tenant decides to buy the home.
- Lease Term: The lease term is the length of the rental period, which is usually one to three years. During this time, the tenant lives in the property and pays rent.
- Option to Purchase: At the end of the lease term, the tenant has the option to purchase the property. If they decide to do so, they typically use the option fee they paid at the start of the rental period as a down payment. The purchase price is agreed upon in advance and is usually based on the current market value of the property.
- Obligations and Restrictions: The tenant is responsible for paying rent, maintaining the property, and following the terms of the lease agreement. The landlord is responsible for making any necessary repairs and maintaining the property. The tenant may also be restricted from making certain changes to the property during the rental period.
- Closing the Sale: If the tenant decides to purchase the property, the sale is typically handled by a real estate agent or attorney and is completed in a similar manner to a traditional home purchase.
It's important to have a clear understanding of the terms of the agreement and to have a written contract that specifies all of the terms, including the purchase price, the option fee, the lease term, and any obligations or restrictions.
