We all want to have our own homes. A home is one of the best ways to acquire a tangible asset that serves as a fruit of years of hard work. Unfortunately, it is too expensive for most of us to buy in cash. The common practice is to apply for a home loan that will help you afford the big amount needed to own a home. Unfortunately, some people find it tough to get a mortgage these days because of all the qualifications and requirements needed.
Whether you are being declined because you have a bad credit score or you do not have money for a down payment, you have another option to own a home though rent to own real estate.
How does lease to own arrangements work
But how does this type of transaction work?
Investopedia.com refers to this as lease to own instead or rent to own. It is defined as an arrangement that home buyers and home sellers take on to allow the former to rent a property with the intention to purchase. Here are the important points that you have to know.
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The lease agreement will identify the rental price that the buyer has to pay to the seller and it is usually higher than the market index.
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The agreement also hold various fees that the renter has to pay like rent premiums or an option fee. These are all negotiable and varies with every arrangement.
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The buyer and seller has to agree to a purchase date and the price for the property. A lease option expiration date has to be set so that the buyer will have ample time to decide on the purchase or not.
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The lease option is the time when the buyer is allowed to rent the property before they are obliged to buy the property. They can choose to make the purchase prior to the expiration of this option. It can last from a few months to a couple of years.
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Upon making the decision to purchase the property, the seller will use the paid rental price as credit for the purchase price. The buyer can choose to use as part of the down payment, closing cost or they can opt to keep it as their savings. At least, if they have the extra cash to finance the down payment or closing costs.
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In case the buyer decides not to buy the property, the seller gets to keep the whole rental amount.
When deciding to opt into a rent to own agreement, you have consider the timing of the transaction. In most cases, this will cost you more than the usual home buying transaction. However, it is also very helpful for people who need to transfer to a new place immediately. It also helps them if they wish to start living in their own home – but the lack the finances to make it possible.
You also have to know that this type of home buying option is only best when the housing market is not in its best condition. Unless you can find a seller that is really in a hurry to sell to get finances, then it will be difficult to find one that will be willing to transact with you.
Pros and cons of lease-purchase agreements
Rent to own arrangements are typically buyer-friendly but you have to know the pros and cons of this arrangement. You can make it work regardless if you are buying in a buyer’s or seller’s market. Make sure that you know the risks of this arrangement because most of the agreements are very specific. If you miss one payment or you are late, you might forfeit the whole agreement and end up losing the rental money that could have been your down payment.
So here are the advantages and disadvantages of a rent to own arrangement.
Advantages
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It allows homebuyers to experience the property and general neighborhood without any commitments.
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It helps improve the creditworthiness of the buyer so that they are more eligible to get a mortgage loan.
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It gives buyers the time to build up a down payment for the home without wasting money on another rental cost.
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It permits buyers to go after high price real estate properties.
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It provides sellers with immediate cash for homes that would have sat out in the market for a long time.
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It protect the seller in case the buyer decides to walk away from the arrangement.
Disadvantages
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When buyers fall behind on their payments, it could get them evicted and lose the money being put aside for the purchase price.
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Falling home prices could end up making the buyer purchase above the market value of the home. It is possible to renegotiate but that will depend on the seller.
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In case the buyer still cannot apply for a mortgage, the whole arrange will also forfeit.
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Some sellers offering rent to own arrangements are actually going through foreclosure already. This could keep the buyer from owning the home in the future. Unless the bank decides to sell the home to the buyer instead of going through the ugly foreclosure process.
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For sellers, in case the buyer decides to walk away from the lease option, this will leave them with losses – depending on the market of course. In case the house prices are falling, and the original lease option buyer walks away, they could sell the home for a lesser amount compared to selling a few years earlier.
It is very important that buyers make sure that they can afford the purchase and rental price of the home. It is a mistake to just focus on the monthly rent that you will have to pay. You need to consider other costs like the maintenance costs that could be part of the lease agreement. Failing to keep up with the clauses in the agreement can really cost you. Use online rent to own calculators like the one of Mtgprofessor.com or something similar. That way, you can check which option is really beneficial for you.
Tips when having trouble with your home loan
Before you finalize your rent to own option, make sure that you will qualify for a home loan when the agreement expires. Otherwise, you will lose the money that you have been paying on rent. Here are some tips to help you out.
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Check out the reasons why you could be declined of a home loan. Make sure that you prepare yourself to guarantee approval.
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Get a pre approval on your mortgage. Or at least, calculate how much you can be approved.
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Improve your credit score. This will help you get a mortgage plus a low interest on the agreement.
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Save up money. Even if you are already putting aside money for the downpayment with the rental amount, it still helps to have the cash on hand to take care of other fees like for the closing costs.
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Come up with a payment plan for your upcoming mortgage. This will help you determine how much you can really afford for a home. The rent to own property that you could be opting to buy may be beyond your financial capabilities.
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Pay off your debts. Since you will be taking on quite a huge amount of debt, you may want to keep a tight lid on your spending and pay down the existing amount that you owe. There are various debt relief companies that you can opt to hire for this service.
While rent to own options may sound like a great idea, you have to carefully sift through your options to know if it will benefit you or not.