Home Buying

Rent-to-Own Homes: How the Process Works

Rent-to-own is a creative process that can be a win-win for both the homeowner and the tenant. The homeowner receives a cash payment to cover carrying costs, as well as the assurance that the house will eventually sell. The benefit to the tenant will vary with each different set of circumstances, but in general, the tenant can get into a home earlier than they would otherwise be able to.

The way rent-to-own works is that a contract is drawn up stating terms of the rental, and when the lease is up, there will be an option to buy the house. Usually, the opportunity to buy comes within the first three years. Every contract will have different language, and there are many ways of setting the terms of the deal. Rent-to-own works because both parties benefit, and because of that, both parties are motivated to come to an agreement.

Why Would You Want to Rent-to-Own?

Renting a house first can give you a taste of what it’s like to be a homeowner. And more specifically, renting before buying shows you what it’s like to be a homeowner in that neighborhood and what the experience is inside that particular house.

Beyond the idea that renting to own is a test run as a homeowner in that area, sometimes it just makes economic sense. You may not have enough money to use as a down payment on a house, but you have no choice but to move due to various external circumstances. You may choose to rent rather than buy, but the rent-to-own process can work wonderfully for the right house.

In many circumstances, a portion of the money you pay in rent each month goes towards your eventual down payment. With this system in place, it’s much easier to come up with the down payment when it’s time to buy.

Other reasons to start the rent-to-own process are that you need to work on your credit score before getting a mortgage with a quality rate. Many first-time homebuyers haven’t had a very long time to build up their credit, and the rates they’re offered are higher than usual due to their lower than average credit score.

The good news for those with lower credit is that you can raise your credit score a substantial amount in just a year or two, which makes rent-to-own the ideal option to get into a house and receive a better mortgage rate when you buy. However, you must also consider that rates could always rise by the time you can apply for a mortgage. At the same time, rates could also go down during that time. While some can identify trends and predict where rates are going in the short term, the rise and fall of the cost to borrow money is unpredictable over a multi-year stretch.

Why Would a Homeowner Want to Do it?

When a home has been on the market for a long time, homeowners rightfully may begin to panic. The process of selling a home is incredibly hard to predict. You have to select a listing price that will attract home buyers, while also not leaving money on the table.

A homeowner may have priced their house too high, and the listing isn’t getting any attention. Or they could have set the price right, but listed at the wrong time of the year and have been unlucky with homebuyers. No matter the reason, once a home sits on the market, it begins to develop a stigma. Homebuyers browsing on Zillow see that a house has been on the market for over 100 days and begin to wonder what’s wrong with it. While this is entirely unfair to the sellers, it’s also a completely rational thought for a potential buyer to have.

Buying and selling a house is one of the most significant financial transactions of your life. Because of this, stress levels are already peaking. And if your home is sitting on the market and the days keep adding up, it might be time to think about offering the house for rent to at least pay the carrying costs of owning the home, like property taxes and utilities. If that rental eventually turns into a sold home, all the better.

How Can I Start the Rent-to-Own Process?

The first step in starting the rent-to-own process is to get pre-approved for a mortgage. Getting pre-approved means that the bank takes a look at your finances and tells you how much of a loan they would be willing to approve you for when you buy a house. It is not quite the same as securing a mortgage once you’ve agreed to buy a home. But it’s a way to know how much you can afford and will reassure a home seller that you have the means to go through with the purchase.

We just mentioned above that one of the reasons you may be starting this process is because you don’t think you currently can be approved for a mortgage. But it’s still important to know if you’ll be able to afford the house once the option to buy comes up. Even if you are not pre-approved by the bank, by going through the process, you’ll know where you need to be with your finances and what areas need to be improved upon before it’s time to buy.

Once you get pre-approved, you should find an attorney that deals specifically with real estate. This is not the time to use an attorney friend that doesn’t focus on real estate. Your attorney will guide you through the contract and look out for your best interests.

Do I Have to Buy the Home When the Lease is Up?

No, you are not locked into buying the house in most rent-to-own circumstances. Specific language will be drawn up in the contract, so be sure to know what this language is before signing anything. You should have your real estate attorney look over any agreements you may be entering into and make sure your attorney knows exactly what you need. Your attorney will have your back and should be doing everything possible to secure you the best deal.

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