If you do not have the means to purchase a home right now, but you would like to purchase the home you currently rent, you might be able to enter into a rent to own contract with the landlord. This program enables you to continue renting your home with the option to purchase it at some point down the road.
The Difference in the Contract
The rent to own contract differs from a standard purchase contract as well as a standard rental contract. You have different lingo the landlord must include in order to determine the length of time you can rent the home; how long you have to purchase it before the option expires and any money the landlord requires up front in order to exercise your right to rent the property until you can purchase it.
What the rent to own contract does is keeps the landlord from putting the house on the market. Let’s say he intended to put it on the market this week, but you asked for the option to rent until you can purchase it. If the landlord agrees and signs the contract, he cannot put the home on the market until your right expires, which is specified in the contract.
In addition, your contract will not only specify how long you have to exercise your right to rent until you can purchase the property, it will also state how much of the rent you pay can go towards your purchase price as well as how much money he wants down as earnest money. Not every landlord will require money up front, though; it depends on how active the housing industry is in your area. If the landlord knows he could sell the house rather quickly, he might charge you a fee upfront in order to keep it off the market. If the housing market in the area is slow, though, he might not require a fee because he knows he would not sell it very quickly in the market right now.
You May Pay Higher Rent
You should understand you will likely pay higher than the market rent in your area when you have a lease purchase agreement. This is in exchange for the right to hold onto the home for now. This extra money usually goes towards your purchase price when you finally close on the home. If you do not close on the home, however, you should know you will likely forfeit the extra money you paid the landlord. This is his compensation for holding the home for you. If you fail to purchase it by the expiration date on the contract, the landlord has the right to put the house on the market after your contract expires.
Locking in a Price
When you rent to own a home, you lock in the agreed upon price at the time of the contract. This could work for or against you, depending on the market’s situation at the time. If housing prices fall before you exercise your right to purchase the home, you could pay an inflated price for the home. This could mean you will need to make up the difference between the purchase price and the appraised value if the values drop significantly because no lender will provide more funding for a home than the home is worth. On the other hand, if the prices increase, your interests are protected since you agreed on a lower price in the contract. The seller ends up losing out in this scenario, which is why they often slightly inflate the rent to own price in order to protect their own interests.
How Long can you Rent?
Every landlord sets his or her own terms with a rent to own contract, but generally, you can rent for 1 to 3 years before you have to decide if you will purchase a home or not. The longer the rental period, the more money the landlord might require up front, just to give him a little more insurance that the transaction will go through in the end.
Securing Rent to Own Financing
Before your rent to own option is upon you, it is best to find financing. You have plenty of time to save money and work on your credit score while you rent, so obtaining financing should not be an issue. Because the process can take a while though, you should start as early as possible. You need to make sure you have a “good” credit score, stable employment and a low debt ratio in order to qualify. Talking to a lender throughout the rental process can help you determine what you need to work on in order to get the most lucrative financing. The worst thing to do is wait until the last minute only to find out you do not qualify for financing as this could cause the rental period to expire and you to be without a home.
When you decide to rent to own rather than outright purchasing a home, you should have the expertise of a real estate lawyer on your side. He will make sure the terms of the contract are favorable to you as well as that you have adequate time to get your finances together. He will also make sure you do not pay too much rent outside of the normal rent premium or any outrageous fees for anything else during the rental period.
Choosing to rent to own is a great way to become a homeowner while you rent. The home becomes yours in a sense, but is not official until you execute the purchase contract. It gives you something to work towards while supplying you with suitable housing in the interim. Make sure you shop around for the right real estate lawyer and lender to ensure your rights and interests are protected.