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How Does Rent to Own Homes Work?

A rent-to-own home is a rental agreement that allows you to make progress toward owning the property when your lease is up. A portion of your monthly payment is credited to the purchase price of the property.

You and the seller will agree to a contract that includes both your rent and how much you’ll be required to pay toward the purchase of the property. You may also be asked to pay a onetime, nonrefundable fee.

Paying More Than the Home is Worth

Many rent-to-own contracts name a purchase price in the agreement, which can be based on an appraisal of the property or on what the seller predicts the home will be worth at the end of your lease. Unless you save enough cash to cover that amount, or can get a mortgage that will pay for it, you’ll be paying for the house at a higher price than it’s actually worth.

If you change your mind at the end of your contract and don’t buy the home, most rent-to-own agreements allow the seller to keep any money you’ve paid toward the purchase price. It’s important to talk to a real estate attorney or top local agent with rent-to-own experience before you sign any contract.

The other drawback is that most rent-to-own contracts don’t report your rental payments to the credit bureaus, so you won’t be building any positive credit history on the property. This makes it harder to qualify for a mortgage when the lease ends.

Paying More Than You Can Afford

Many people dream of owning a home, but buying one requires saving and scrimping to squirrel away money for a down payment and careful spending to keep credit scores high. The rent-to-own option can make sense for some because it allows them to lease a house they would like to buy and credit a portion of their monthly rental payments toward a future down payment on the property if they decide to purchase at the end of their lease term. For more info, do visit this website how does rent to own work.

However, the purchase price you lock in at the beginning of your lease is often inflated to cover rising home values, which may not happen. And if it doesn’t, you may find that your mortgage lender is reluctant to lend on the property based on the low appraisal value you agreed upon at the start of your lease, leaving you with a lot of extra cash in a home you can’t afford. That’s a risky way to play the market.

Making Your Monthly Payments on Time

Owning a home is a dream many renters have, but buying a home can take years of scrimping and saving to squirrel away enough money for a down payment. Rent-to-own homes can offer a path toward homeownership without all that work. A portion of your monthly rent credit goes toward a down payment on the property and you can purchase it at a predetermined price when the lease term ends.

However, if you miss a payment on the contract, the option fee and the money that has been put toward the down payment will be lost. That’s a big risk if you plan to buy the home and could lead to financial and legal trouble. It also leaves you with the potential to pay more than the property is worth. That’s because the purchase price you lock in at the beginning of the lease is usually inflated to cover rising home values. But home values can go down as well as up.

Shopping for a Mortgage

Renting to own is a great idea for people who want to buy a home but can’t qualify for a mortgage right away. This may be because they’re still paying off debt or saving up a down payment.

However, the big drawback of a rent-to-own contract is that it doesn’t guarantee that you will actually purchase the home at the end of the rental period. You could also find that you’re locked in to a certain price based on the seller’s predictions for future home values, so you could be stuck with the house if prices go down.

One good thing about rent-to-own contracts is that you don’t have to compete with other buyers for the property when the rental period ends. This can be especially helpful for those with poor credit scores or a history of bankruptcy, foreclosure or repossession that would prevent them from getting approved for a mortgage. Renting to own is also a good way to build credit and improve your financial position before you’re ready to buy.

 

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