Buying a home is one of the biggest investments you can make in your life and it is a fact that not everyone has the luxury. Most buyers use a mortgage in funding and purchasing of their homes. To qualify for a mortgage, you require a down payment and a good credit score, and without these options, property ownership becomes a big problem.
If you suffer from financial constraints, you can choose to rent a property with the option to buy it later in the future. It is a process referred to as rent-to-own and although it is not very common in real estate at the moment, it still remains a way of buying a home.
How It Works
The rent-to-own agreement starts with forming a contract and an owner promises to sell their house to the tenant for a certain price and within a predetermined time frame. Buyers usually pay a premium or a portion of the rent is set aside in an escrow account which will go towards the buyer’s final costs or the purchase price of the home.
There are two options for the rent-to-own agreement: Lease agreement with a purchase contract or a lease agreement with an option to buy. The first lease agreement is easier and people are more familiar with the procedures and paperwork. It involves both a lease agreement and a purchase agreement with an agreed upon pricing method of the home.
The second lease agreement requires a lessee to pay a fee called an ‘option fee’ for the right to buy a home at a later date. All the terms of the contract are specified in the agreement and if you exercise your option, the seller is obligated to sell you the house and use the option fee in the buying price. If the tenant fails to exercise the option fee, the seller retains the option fee to themselves.
Knowing The Specifics Of The Agreement
Before entering a rent-to-own contract, it is important to know the specifics of the buying process, the price of the property and your rent’s contribution to the purchase price. You should know what you receive after paying a premium on the lease payments. The contract should also specify how and when the house buying price is determined and paid. You might agree on a price after the lease ends or before the signing of the contract. Lastly, it is crucial to know which option of the rent-to-own agreements you are entering and the consequences for any breach of the terms.
Benefits Of A Rent-To-Own Agreement
The rent-to-own agreement can be a great way of buying a house for aspiring homeowners with financial difficulty. The contract allows you to improve your credit score, get your finances in order and save cash for a down payment. It can be especially beneficial to the buyer because you get to live in the house before buying.
Responsibilities For Maintenance And Repairs
Rent-to-own agreements differs from the normal lease agreements. Responsibility for the maintenance and repairs of the home depends on the terms of the contract. In normal circumstances, it is the responsibility of the landowner to handle repairs but it may not be the case depending on the agreement. You will need liability coverage and renter’s insurance to better safeguard your position but the landowner is still responsible for insurance, taxes and homeowner association payments.