How Does Rent to Own Work When Buying a House

Rent to own is steadily growing to be a popular option in a market that is overflowing with houses that have been put up for sale. Basically, rent-to-own is a contract to buy, but the difference between this and a regular sale is that the closing date in this case has been extended for one to two years. Rent-to-own benefits both the tenant and the seller – the renter has ample time to arrange for financing, while the seller covers his mortgage payments with the rent. Rent-to-own is perfect if you like a house which you cannot pay for at the moment, and do not want anyone else to make off with it while you try to arrange for the money.

Lease Purchase vs. Lease Option

Also known as lean purchase, rent-to-own is often confused with lease option – however, the two are entirely different. Lease option only offers the renter the option to purchase the home. The renter has not made an offer, and if s/he is presented with a contract, he has the right to refuse or accept. In this scenario, the renter can either arrange for financing and close on a loan, or prepare to move out. A lease purchase, on the other hand, is a straightforward contract to buy, which has an extended closing date, and the extension is used by the buyer to arrange for financing.

Buyer Advantages

The buyer gets to move into the house he likes enough to want to purchase it, and try it out for a period of up to 2 years – s/he can try out the neighborhood, the location, and the schools nearby before closing the deal. The extension granted for the closing date also allows the buyer plenty of time to resolve credit issues and save for the down payment. The buyer has the advantage of being able to freeze the home’s price one or two years before s/he needs to close on the mortgage loan. S/he also has the option to list the payments that will go towards the sale price or down payment in the contract.

Seller Advantages

The biggest advantage the seller has is that s/he has a tenant who is interested enough to want to buy the house, and take responsible steps to ensure that s/he can make the payments. This also suggests that the tenants will take care of the house, since they will be purchasing it in the future. The monthly rent the seller receives can be used to meet his/her monthly mortgage payments. A non-refundable deposit can also be used to seal the contract. If the sale is not closed by the end of the extension period specified in the contract, the deal can be terminated or re-negotiated.

Suggestions

Before you venture to sign a lease purchase contract, make sure your credit history is good – clear any outstanding issues in the credit report, and work on raising your credit score if you need to. Read though the credit report carefully, for duplications, errors, and any information that might be outdated. Meanwhile, you will also need to work to secure your loan. Choose a reputable mortgage lender, and obtain prequalification for a loan. The lender will help you work out how much you can afford in monthly mortgage payments, and discuss important issues like down payment and loan types.

Warnings

Buyers need to be wary, and check if the asking price is reasonable, before they go ahead and sign the contract. Hire a real estate agent to determine the asking prices of comparable homes in the area, and for how much recently sold comparable properties were sold. Hire a home inspector to look the home over and see if it needs any major repairs – the costs of these can then be worked out with the current owner. Get a real estate attorney to help in drafting the contract, and ask him/her to conduct a title search – this will confirm whether the clear title can be passed on to you by the seller when the mortgage is settled. Make all your payments via checks, and have proof of timely rental payments and of deposits you made – this way, you can obtain credit for them from the mortgage lender.