Rent to Own: Advantages and Disadvantages & How It Works
There are huge financial and personal benefits to owning your own home. Statistics show that 90% of millionaires became so through owning Real Estate. To buy a house you'll need a good credit score, consistent income, and possibly a down payment. With a good credit score and consistent income you might be able to get 100% financing and need only $500 as a down payment. Sometimes you need time to repair your credit or need more time at your job before you can get approved for a loan. When you need a little more time, but want your rent to go towards your home purchase, then rent to own is an option.
Is Rent to Own a Good Idea?
Rent to Own is a popular choice for those who can't purchase yet. Think of renting to own as being similar to leasing a car. You sign an agreement that says you have a period of time to exercise your option to buy the property. You pay an option fee for the right to buy the house at the price you agree to in advance. During that time period you pay monthly rent until you are able to purchase the property or until the agreement date ends.
Are you sure you can't Buy a House yet?
Many people assume or get bad advice. We work with the best lenders in town and can help you with getting the best advice. Many of our clients were previously turned down by other lenders prior to coming to us. Whether you want to buy a $100,000 house or a five million dollar house, we will help you. There are 100% loan options, self employed bank statement only loans that require no tax return, Reverse Mortgage loans if you are at least 62 years old, and many other great loans. Most banks only know about the few loan options they work with. We can help you with all the options out there to fit you with what is best in your situation.
Why do Sellers Choose to Rent to Own?
There are many advantages to a seller for choosing to Rent to Own their home instead of just renting it or just selling it. First advantage is there's a longer term of guaranteed income. There's a written contract typically for one to five years with an option fee paid that a buyer has paid in advance.
Another advantage is the tenant will probably take better care of the home because they plan to purchase it, although be careful, sometimes a tenant will make major changes to the home when they think they will be buying it. I had a tenant paint kitchen cabinets black because he thought he'd be buying the house. When he cancelled the agreement I was left with fixing the house. If the buyer doesn't buy the property, typically the option fee they paid in advance is non-refundable.
My favorite advantage to a rent to own is sellers can have in the agreement that all repairs and maintenance will be made at the buyers expense.
Equity increase is another advantage. While they are paying rent, you'll be applying that rent to the mortgage and reducing the balance due.
Price lock can be another advantage but it can also be a disadvantage. You'll lock in a price that you both agree to and it will typically have an escalation cause for each year's price increase. Sometimes you'll find the market has increased higher than what you built into the contract and you may be disappointed if you sell at the reduced price. However if the price you set is higher than the current value and the buyer is getting a loan to purchase, their loan will be contingent on the appraised value. If they don't have the cash to make up the difference, they won't be able to get the loan and buy the property. At that point you'll be in a situation of deciding if you are willing to reduce the price so they can purchase it.
Rent to own is typically very beneficial in a soft market when houses are selling very slow.
How does a Rent to Own Work?
The owner and tenant will agree on a monthly rent, a purchase price, a time period for the purchase options, and the option fee deposit. You'll sign a legal contract with all of those terms in it.
What does it mean to Rent to Own a Home?
Rent to own means the property has an agreement between the buyer and seller with a time period and sales price agreed upon. A portion of the rent might be applied toward the purchase if agreed upon in advance.
What is a Lease Purchase Contract?
The Lease Purchase is the agreement in a Rent to Own. It combines a Rental agreement to a Purchase Agreement.
Can I get Credit for my Rent Paid?
That depends on if it's in the written agreement that both parties agreed to. Also ask your lender in advance before signing the agreement about how that credit can be applied to your purchase. Lenders are very strict about what funds can be used toward the purchase and might not allow it if you don't pay it in a separate monthly check or some other way. Consult your lender for advice in advance before signing the contract.
Do I need an Attorney for a Lease to Own or Rent to Own?
Yes, I would highly recommend a Real Estate Attorney write up the agreement and that it is recorded at the records office. Your attorney will be sure that your agreement meets the current laws. Who pays for the attorney? Good question! That's up to the buyer and seller to agree on who will pay.
Will Rental Payments Improve my Credit Score?
No not usually unless they report it monthly to the three major credit agencies: Equifax, Transunion, and Experian. You cannot as the payor self-report the payments. It would have to be reported by the one receiving the payment. Most landlords will not report it.
Do Late Payments affect your Credit Score?
It depends again on if the seller / landlord reports the late payment. Also be careful that your agreement doesn't have a clause about the contract being voided if you pay late.
Where do I find Rent to Own Houses in Wilmington, or Rent to Own Houses in Leland, or Rent to Own Houses in Hampstead or Other Areas?
Typically you'll find them advertised on Craigslist, Social Media, and sometimes in the mls. In a very hot Real Estate market be careful about why a house is Rent to Own.
There are companies that are built on Renting to Own homes. They have higher down payments, higher rent, and expect that the buyer will not be able to buy. Therefore they get your deposit, your higher rent, and they get to keep the house.
Where do I Start?
First step is let's be sure that you can't qualify to buy a house now. If you can be approved for a loan now, you'll have more house options that renting to own. You'll also be able to lock in your interest rate and start paying your own mortgage. Buying your own house is the 1st step to building wealth and a financially better future for your family. Regina Drury Real Estate Group is a great place to start your home ownership path.
