Rent-To-Own Overview
Individual homeowners were the most likely to offer the rent-to-own model, in which tenants/buyers had the option to buy the condo or house they rented from their landlord/seller.
Tenants had more options after the crisis. Large real estate investment companies bought up homes across the country and began implementing the rent-to-own model on a larger scale.
This formalized the rent-to-own model. Tenants can use a portion of their monthly rent payments to paying down for the eventual purchase of the home they rent.
Many people are curious about how rent-to-own works. So let's look at the basics of renting-to-own to answer this question.
Tenant/Buyer Perspective
Rent-to-own is an option if you are looking for a home. Rent-to-own is also an option for those with less than perfect credit or who need to build credit while renting.
Rent-to-own refers to a lease or rental agreement that allows the tenant to purchase the condo or house later, usually within three years. Rent payments include rent payments as well as additional payments to help pay down the down payment. The lease contract will specify the tenant's monthly rental payment, the number of rental payments that accrue towards a down payment, as well as the price of the home.
To ensure that you are able to afford the home, it is important to get pre-approved for a mortgage at least the price indicated in the lease or contract. Renting to go is not an option if you cannot afford it. In addition, the contract may increase the rent price to cover the amount of the rent that will be accrued towards your down payment.
Let's take, for example, a rent-to-own lease with your monthly rental payments at $1450 and $250 per month going toward a downpayment. The purchase price is $250,000. So you would have $9,000 to put toward a downpayment over the three-year period, which would be 3.6 percentage of the purchase price.
If you don't have any extra money, you can still buy the house using a 3.5 percent FHA loan. However, it might be worth it if you have pre-approved for the loan at the beginning.
What options are available if you can't afford to buy a home but still want to rent it? First, ask the seller whether the property can be rented cheaper without the rent-to-own option. This is usually true because most mortgage lender does not allow down payment accruals to exceed the local market rent. In this case, if you don't have a rent-to-own option, your rent might be $1,200.
An attorney should review any rent-to-own or lease. There is no industry standard for how to write rent-to-own contracts and rent-to-own leases. It is important to know who holds the down payment funds and what tax regulations are applicable.
Rent-to-own is a great option because your housing plans can be set up in one go. If you don't need or want to move, this works. Rent-to-own is not a good option if you need or want to move.
For people with a bad credit history that has taken a while to correct, renting-to-own can be a great option. Your credit score is a major factor in the rate of your mortgage. This can have a significant impact on your monthly payments. Your credit score can also determine your eligibility for a mortgage.
Your credit score can be improved by paying your rent on time. Make sure that your landlord/seller reports all rental payments to credit reporting agencies. You can do many things to improve your credit score during your rental period. First, request your free credit reports. Federal law entitles you to one free credit report once a year from AnnualCreditReport.com, a website set up by the three major credit bureaus.
Landlord/Seller Perspective
Rent-to-own can be a great option for sellers who have had their houses on the market for a while and cannot find buyers. Maybe buyers can't afford a downpayment or have enough credit to be eligible for a mortgage. Rent-to-own can be attractive to potential buyers because it allows them to build credit slowly and make their down payments over time. Make sure that your buyers have sufficient credit to be able to get a loan once it is time to purchase.
You will need an attorney to help you draft a contract. Unfortunately, there are no standard templates available for renting out a property.
Two of the most important benefits for a homeowner selling their condo or house in a rent to own agreement are:
You can lock in your future home sale price now and avoid market fluctuations.
Renting to a tenant who ultimately wants to own the property will increase the quality of your tenant and make the condo or house more valuable.
The downside to renting-to-own is that you may want to sell your condo or house sooner than you have been allowed by your lease or contract. If this happens, you may be bound to the terms of your agreement with your tenant/buyer. If you require this flexibility, consult your attorney about negotiating this sale clause in your contract.
Individual Landlords/Sellers vs. Institutional
Individual homeowners usually offer Rent-to-own leases. These contracts typically last three years. However, many institutional homeowners, such as real estate investment firms, have two-year lease agreements that can be extended up to four years beyond the initial term. This allows for more flexibility for buyers and tenants.
Institutional rent-to-own companies are frequently publicly traded. This means that they will be subject to more regulatory scrutiny. Your contracts will clearly state the terms of engagement, who holds down payment funds, and how disputes are handled.
Rent-to-own giants also offer consumer assistance to assist you with credit repair and counseling. Some companies even required renters to complete credit counseling. This could be a great resource if you are in need of credit assistance.
If you have perfect credit, you might want to stay away from companies that offer this option or work with an individual landlord/seller.
