Through a rent-to-own home agreement, you can lease a property and possess the option to buy it in the future. A rent-to-own arrangement can be established with individual landlords or rent-to-own companies. Like a standard lease, monthly payments are made to the landlord or company; however, a portion of those payments is set aside and will be utilized toward the down payment when purchasing the home.
Rent-to-own presents a viable alternative for potential buyers lacking sufficient upfront funds for a down payment. Individuals facing mortgage rejections due to poor credit scores may also explore rent-to-own as an option, as they can work on improving their credit standing during the lease period and get approved for a mortgage at the end of the lease. Some rent-to-own companies even provide credit repair programs, aiming to assist such individuals in securing mortgage approval at the end of the lease term.
Rent-to-own programs are often local to a city or a region. Thus, to find a local rent-to-own program, you may run a search such as ‘rent to own homes near me’ or ‘rent to own houses near me.’
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Typically, rent-to-own contracts require an initial upfront payment ranging from 1% to 5% of the property's agreed-upon purchase price, referred to as an 'option fee,' 'option to purchase deposit,' or simply a 'down payment.' This non-refundable deposit grants you the option to purchase the home and is credited toward the total purchase amount if you choose to buy.
If you elect not to buy the home, you will typically lose the accumulated rent credit and the option fee.
Furthermore, rent-to-own agreements have a predetermined timeframe, typically spanning two to five years. The future purchase price of the home is determined either before entering the contract or during the contract if the lease term is long, such as four or five years.
There are two kinds of rent-to-own agreements — Lease-Option Agreementand Lease-Purchase Agreement. The lease-option agreement grants you the choice to buy the property you're leasing without any penalties if you decide not to proceed with the purchase. In a lease-purchase arrangement, you commit to buying the property once the lease period concludes, and deciding not to follow through may result in penalties, potentially leading the landlord to initiate legal measures against you. In both cases, the option fee and the rent credits will be forfeited.
Let us assume that you are interested in buying a home that is currently listed on the housing market for $450,000. You decide to enter a rent-to-own agreement for two years, and the purchase price after two years is calculated as $478,000, based on an annual price increase of approximately 3%. The overview of the agreement would look something like this –
At the end of the two years, you will have $14,340 from the initial downpayment and $12,000 from the rent credits to apply toward the purchase price of the home, and you will have to get a mortgage for the remaining $451,660. If you choose not to buy, you will lose the deposit and the rent credits.