How to Buy a house with the Rent to Own program? How Does the rent to own home mortgage works?

How to Buy a house with the Rent to Own program?

How Does the rent to own home mortgage works?

The process starts, of course, with a contract. Actually, in this case, it starts with two: a rental agreement and an option to purchase. Here’s what you need to know about both: Rental Agreement Your rental agreement will look much like a standard lease. It will specify your rent (more on this in a minute) and the term in most cases, it will be two or three years. There will be several standard terms and conditions you’ll need to meet:

For instance, no smoking in the house, no pets, occupancy limits, and general conduct requirements. Violate these terms, and just like any tenant, you can be kicked out. However, this time, you also risk losing any money you’ve paid toward the home’s eventual purchase. One big thing that may be different in this lease agreement: You, the tenant, may be responsible for maintenance costs and general upkeep of the home instead of the landlord. The logic here is that you’ll be motivated to keep the house in top shape if it will be yours in a few years. However, the landlord would still be on the hook for any repairs so major that the home would be uninhabitable without them.

​

Lease Option to buy!

The lease option gives you dibs to purchase the home you’re renting,  typically valid for a term equal to the lease term set forth in your rental agreement. 

So if the rental agreement specified a three-year lease term, the lease option will usually give you three years to buy the house without worrying about anyone else swooping in and snatching it out from under you. Make sure you’re signing a lease option, and not a lease purchase. Sometimes these terms are used interchangeably, but a lease option gives you just that the option to buy the home. A lease purchase obligates you to buy the home and means the seller can take legal action if you try to back out.

How Much Does Rent-to-Own Cost Me?

First, let’s talk about rent. A certain percentage of your rent will usually go toward the purchase price of the home.This is something you can, and should, negotiate with your landlord. One thing to keep in mind when you negotiate: Because of this credit, you will likely be paying more to rent the home than you otherwise would. For instance, a house that would normally go for $1,000 a month might go for $1,250, with the extra $250 saved as credit toward the home’s purchase.

So if you seek a higher credit, your rent may rise accordingly. Also note that your lease will probably specify that if you’re late paying rent, you’ll lose that month’s rent credit. Next, let’s talk about the home’s purchase price. In most deals, you will agree to a purchase price upfront, typically current market value or a bit higher. In limited other instances, you may delay that decision until your lease term is up. Whether one or the other will be more beneficial hinges on whether the home’s value rises or falls during that time. A key point in either scenario, however, is that the purchase price is also negotiable just like you’re buying a house the traditional way.

Let’s look at an example. You enter a two-year rent-to-own agreement for a townhome. The option fee is 3% of the home’s $200,000 purchase price, or $6,000. This is due up front. Your monthly rent is $1,600, and 20% ($320) goes toward the purchase of the home every month. (Your landlord will probably put it in an escrow account during your lease.)

At the end of your two-year lease term, assuming you exercise your option to purchase, the fixed $200,000 purchase price will be discounted by a) the amount of the option fee and b) the total rent credits. So subtracting the $6,000 option fee brings the price down to $194,000. Then, subtracting $7,680 in rent credits ($320 x 24 months) further reduces it to $186,320. And remember: If you decide not to purchase the house, the option fee and credits are nonrefundable. 

Who Benefits Most From Rent-to-Own Agreements? Who Should Pass? For the right buyer and seller, a rent-to-own deal can be a win-win. But on both sides, as with any major financial decision, there are pros and cons you’ll want to note. Pros for buyers Rent-to-own can be worth looking into for would-be buyers who simply can’t wrangle a mortgage the traditional way. Typically, that’s because you either lack enough cash for a down payment or your credit score isn’t strong enough to be approved for a mortgage (or both). With arent-to-own agreement, you get more time to boost your credit and save up, all while getting a head start on building some equity.