How To Buy a Rent-To-Own Home

Purchasing a Rent-To-Own Home

People end up renting “rent to own” homes for a variety of reasons. Maybe the renter can’t get together a down payment of 10% to 20%. Perhaps you have bad credit at the moment, but you want to work towards owning your own home. Or maybe you can’t afford a full mortgage and yearly property taxes at the moment, but you feel the need to start paying towards your own house.

In these cases, one option is a rent-to-own house. You pay rent on the house for a certain amount of time on the agreement that you’ll have the option to purchase the home at a later time. The monthly rent you pay, as well as one or two other fees, act as a kind of down payment on your rental home, while the money you’ve spent shows you have commitment to the home.

With all that in mind, let’s discuss what a rent-to-own home can do for you, and what your obligations are.

1. Option To Buy Within 3 Years

The contract for most rent-to-own homes will give the renter an option to buy within the first 3 years of the contact. Besides rent, there are two other fees you’re likely to be expected to pay. The first is the “option fee”, which gives you the option to purchase the home later. The other is the rental premium. Both will be credited towards the purchase of the home when you decide to buy.

Remember that the option fee and rental premium are added on to the price of your rent every month. This means you’ll be slightly higher than you would for a pure rental home, but those two additional charges gives you the option to buy later. If you can’t afford these additional charges, don’t sign a rent-to-own contract.

2. Understand the Rent-To-Own Contract

The risk of a rent-to-own contract is you lose the money spent on the fees if you can’t buy the home in the agreed-upon time. This means if you can’t buy the home in the time before your option expires, you lose the money you paid in rental fees, option fees and the rental premium.

Keep in mind you would have been renting a home all that time anyway, so monthly rental bill isn’t a real loss. But you will lose all the money you spent on the rental premium and option fee, which would have gone towards the purchase of the home otherwise. Essentially, you will have paid extra money every month to rent the rent-to-own home all that time.

3. Have a Lawyer Look at the Rent-To-Own Contract

It’s worth the one-time fee to have a lawyer look at your rent-to-own contract. This is a precaution simply to make sure the rental contract isn’t decidedly to your disadvantage or there’s something fishy about the rent-to-own contract. Have him go over the terms of the purchase to see these are realistic, so you aren’t simply paying higher rents for a house you’ll never be able to afford to buy. Have a banker look at the contract for the same reason.

4. Understand There Are Other Downsides

When you rent-to-own a home, you won’t be able to deduct the mortgage interest or property taxes from owning your income tax form that you would have if you were buying a home. At the same time, you won’t be paying property taxes.

Simply take all this into account when you’re deciding whether to buy a home, rent a home or sign a rent-to-own contract.

5. Be Realistic About Your Purchasing Power

Finally, be realistic in your assessment of whether you’ll be able to exercise your option to buy the home in the time allotted. If you have bad credit and you fool yourself into believing you’ll have good credit to acquire the mortgage loan to buy the home, you’ll be left with an option you can’t afford.

If you have bad credit, the 2-year or 3-year window gives you time to get your credit rating in line. But if you don’t take the steps to repair your credit, you won’t have a realistic chance of purchasing the home when it comes time to exercise your rent-to-own option. Be realistic and take the proper steps to make your dreams of owning a home a reality.

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