If you would like to be a homeowner, but you don’t have enough money saved for a down payment or your credit score needs some work, you might want to consider a rent-to-own agreement. That can bring you closer to your goal of buying a house while giving you time to improve your financial situation.
Types of Rent-to-Own Agreements
There are two basic types of contracts you might encounter. Under a lease-option agreement, you will rent a home for a period of time. When the lease ends, you will have the right to purchase the house.
You’ll have to pay the owner an upfront fee in exchange for the option to buy the property. The option fee is usually a percentage of the purchase price and is generally nonrefundable.
Some or all of the option fee, as well as a portion of the rent that you paid each month, might be applied to the purchase price if you decide to buy the house. If so, that can help you build equity. If you choose not to buy the property, you can simply walk away and forfeit any money that would have been applied to a purchase.
A lease-purchase contract is stricter. It will require you to buy the home once your rental term ends. If you decide that you would rather not own the house, or if you can’t obtain a mortgage, the owner can sue you.
Other Ways That Rent-to-Own Contracts Can Differ
Rent-to-own agreements vary in terms of when and how the home’s purchase price is determined. Sometimes the parties agree on a price before the contract is signed and lock in that price for a fixed period of time. In other cases, the agreement states that the purchase price will be determined based on the property’s market value when the rent-to-own contract expires.
You might be responsible for maintenance while you’re living in the house as a renter, but “maintenance” can mean a lot of different things. It might simply mean that you have to mow the grass and remove snow from the driveway and walkways, or it might mean that you’re financially responsible for any and all repairs that are needed while you’re living in the house.
Do Your Due Diligence
Carefully read a rent-to-own contract and make sure that you understand all the details before you sign anything. A real estate attorney can review a proposed agreement, answer any questions you might have, and assist you if you want to negotiate some of the terms.
You should also have the home inspected and appraised and request a title search to find out if there are any liens on the property. Gathering information on the house, as well as the neighborhood, can help you figure out if it’s truly a place that you would like to own.
