Buying a house may be difficult if someone does not have a good credit score to apply for a mortgage and cash for the down payment. In such cases, one can consider a rent-to-own home. It is a great way to find a decent place to stay without borrowing money or making a significant down payment. That said, one must first understand the basics of the rent-to-home model to ensure the process flows smoothly.
Rent-to-own process explained
A rent-to-own home helps low-income individuals become homeowners. The concept has several elements but is fairly easy to understand. To put it simply, a person rents a house for a specific period and then buys it. The rent charged is higher than the market value, so a portion of the monthly payment goes toward the cost of buying the house.
Once a person finds a home available on a rent-to-own basis, both the renter and the one renting the property will agree to a few points. These include the monthly rental amount, the length of time one may rent before buying, and a purchase price based on fair market value. Understanding a few concepts can help simplify the rent-to-home process.
Upfront option fee
This is a deposit one must pay if they intend to buy the home in the future. The option fee is typically 3% to 5% of the agreed purchase price. If one buys the property, the option fee gets credited toward the purchase price of the home.
Purchase timeline
One must negotiate and commit to a purchase timeline (usually about two to five years). This is the timeline before which they must buy the home.
Rent credit
One will need to make monthly payments that comprise the fair market value plus an agreed additional amount, known as rent credit. This is typically credited toward the home’s purchase price.
Documents required
One may need to sign two documents: a rental lease agreement and an option to purchase agreement. The rental lease agreement details the monthly rent and terms of leasing the property before a purchase. The option to purchase agreement outlines all the purchase items. Its terms include the price one agrees to pay for the home if one decides to move ahead with the purchase, the timeline for the purchase, and the amount of rent credit and upfront option fee.
Benefits of rent-to-own homes
In addition to making the home more affordable for those who cannot make a downpayment, a rent-to-own agreement may have other benefits.
Locked-in price
One locks in an agreed purchase price. Even if the property value appreciates during the lease, the seller must still sell the property at the initial agreed price.
Payments toward purchase
Each month, a portion of one’s rental payment (between $100 to $500) is credited toward the down payment, closing costs, or purchase price.
Delayed closing costs
If one buys a $200,000 home, the closing cost is typically between $4,000 and $7,000. The costs are incurred when one purchases the home. So, in a rent-to-own deal, one will have more time to save to cover all of these fees.
Ways to find a rent-to-own home
Rent-to-own homes help people who cannot make a downpayment or have bad credit. Those looking for such homes can use several tips to streamline the process.
Look online
The easiest way to find rent-to-own homes quickly is via an online search. A simple search with keywords like “rent-to-own homes in my area” or “rent-to-own homes with no down payment” should render relevant results. One could also consider online rent-to-own portals, which are extensive databases designed to help people locate available rent-to-own properties. While some information might be free, others might charge a monthly fee for access.
Hire a real estate agent
An agent can help one navigate the real estate market and offer expert advice related to the buying process. But before hiring them, one should ensure the agent is familiar with rent-to-own homes and the agreements associated with them. If one has not been involved in a rent-to-own home agreement before, taking someone knowledgeable along could be helpful.
Apply for a rent-to-own program
Several programs help people find rent-to-own homes. Each program may have different qualifications and requirements that a potential buyer might need to meet to get the application approved, such as one’s credit score, debt-to-income ratio, and income. One may find several rent-to-own programs via a quick online search or through an agent. After one has explored and read more about each program, one would be better equipped to pick the right option for their needs and eventually become a homeowner.
Present an offer to an interested party
One might sometimes come across properties that look interesting but are not rent-to-own. In such cases, one can present an offer to the interested party. For instance, if one finds a rental property that meets their requirement but isn’t listed as a rent-to-own home, they could consult with their real estate agent to come up with an offer that could be presented to the property owner. If it all works out, one might be able to convince the owner to agree to the proposition.