How does rent to own a house work?

Rent to own houses, also called lease to own, are a great way for people who wouldn't otherwise have enough money for a down payment or a high credit score, to own a home. The process of rent to own homes is like leasing a car. The renters pay a set amount of money per month as they live in the home. A portion of the rent paid monthly is set aside and can be used toward a down payment for the home. The rest of the monthly rent is income to the seller.

Option to Buy

After a period of time, set at the beginning of the agreement, usually within three years, the renters have the option of buying the home. Contracts are made at the beginning of the arrangement in order for both parties to be perfectly clear on the terms. The terms include the house price, rent per month and the set period of time in which the it will be decided if the renter will opt to buy the home.

Extra Fees

There are extra fees included in rent to own homes. Renters have to pay an option fee and a rent premium. The option fee will be put toward the down payment of the home if the renter decides to buy the home. If the renter opts to not buy the home, the option fee is income to the seller. The rent premium is the typical rent plus an additional fee of which a portion also goes towards the down payment if the home is bought.

Rent to Own Advantages

Rent to own homes have obvious advantages. In today's economy, the amount of sellers to buyers varies greatly. A home can be on the housing market for quite some time before it is sold. Rent to own homes can help the seller still obtain some income from the home when otherwise it may be a constant drain on the seller's finances. Buyers have the advantage of working toward home ownership where otherwise they may not have been able to afford a down payment or have the credit score needed to qualify for a mortgage.

Rent to Own Disadvantages

Obviously there are disadvantages to this agreement, as with most agreements, to the seller and renter. A disadvantage for the seller is that the renters can decide the home is not what they expected and walk away from the offer, depending on the terms of the contract. Also, the upfront option fee, which usually consists of thousands of dollars, is very difficult for most renters to obtain. A seller can also not have a late rent agreement. This would allow a seller to void the month of credit for purchasing the home if the renter is just one day late with the rent. This could cause the renters to have a substantially lower amount of money in the credit for when they decide to buy the home, especially if they are late with the rent for several months. Most agreements also provide for the renters to take care of repairs in the home, even during the rental period. If the renters were renting instead of renting to buy a home, then the landlord would be responsible for repairs.

The Contract

Contracts are very important to the arrangement between a seller and a buyer. Sellers can lock in a set price for the home that cannot change after the period of time for renters to decide whether they are willing to buy. This price can be higher than home values are at that later time. Subsequently, the home could cost a lot less than homes in the area at that time. Rent to own homes can potentially be a good or bad deal, depending on the contract obtained at the very beginning of the agreement.

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