Rent to own homes provide an alternative route to home ownership for potential buyers who aren’t quite ready to purchase. In return for immediate tenancy, a renter receives an option to purchase the home at the end of the lease contract which typically runs from 1 to 3 years, according to the National Association of Realtors. Often a portion of the rent is applied toward a future down payment. If you’re considering this type of lease, you should evaluate several important pros and cons before making a final decision.
If you’re a renter aspiring to home ownership, rent to own homes allow extra time to repair your credit and improve your credit score prior to obtaining a mortgage loan. If you don’t currently qualify for a loan, you’ll be given extra time to pay down debt and meet lending standards. Another benefit is that renters will live in the neighborhood and the house they’re thinking of buying prior to committing to a large purchase. Also, some of the costs of home ownership are limited during the lease period, as the seller would typically cover property taxes, insurance and any other expenses as stated in the lease agreement.
For a seller, a rent to own contract is one way to attract a tenant when a house is not selling due to a down market. Rather than have a house sit vacant, the seller can recoup some of their costs until the market turns around.
One of the largest cons of a rent to own home is that time can work against both a buyer and a seller. If the housing market increases, then the seller may lose money by waiting until after the lease has expired to sell at the initial price agreed upon in the initial contract. For buyers, interest rates may rise over the lease period, making the house more expensive to purchase at a later date. Also, by paying rent, you may not save as much for a down payment as you would if you continued your prior living arrangement. Rent to own properties typically charge a premium for the purchase option, so it’s best not to enter into this type of agreement unless you’re a serious buyer.
If you decide that a rent to own home is the best choice for you, always formalize the agreement in writing. You may also want to have an attorney review the contract, as these types of leases can be more complex than a typical rental agreement.
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