Rent-to-own homes: pros and cons and all you need to know Show
Rent-to-own pros and cons: key tips to remember
August 8, 2022 You can buy a home or you can rent a home. But there’s a third option you might not have considered. Renting to own can buy you time to save up for a down payment while keeping you in the front of the line of potential buyers when it’s time to purchase. Maybe you’re not sure you can qualify for a mortgage just yet. Maybe you know you want to move, but you just aren’t sure about a home purchase, and the idea of a short-term rental sends you into alternating fits of dreams and nightmares. If this sounds like your situation, renting to own might be a viable solution. We’ve assembled this list of rent-to-own pros and cons to help you make a careful, better-informed decision about what could be your most significant investment ever. How does it work?A rent-to-own contract is an option for people who know they want to buy a home but aren’t quite ready to buy just yet, giving them time to save and improve credit while securing a home for eventual purchase. They typically work in one of two ways: lease purchase and lease option. First, the seller establishes a term, usually one to three years. At the end of the term, the resident is either required to purchase the home (lease purchase) or has the option to make the purchase or walk away (lease option). Sometimes, both agreements will allow for an extension of the rental period prior to a deal. It’s generally a bad idea to sign a lease-purchase agreement unless you’re sure you want the home, you’ve had it inspected, and you’re financially secure enough to be sure you’ll be able to afford the mortgage at the end of the term. Sometimes, a specified part of your monthly payment goes toward your eventual purchase price. Rent-to-own versus a mortgageIf you don’t have enough money for a down payment on a traditional mortgage (typically 20%), or you don’t have a credit score of at least 629 or so, you might need time to save money and improve your credit. Meanwhile, if you’ve found a home that you’re excited about, and if renting to own is an option the seller is willing to entertain, you could have the potential for a mutually beneficial agreement. You’ll have time to lower your debt-to-income ratio, keeping your interest rate down, and the seller will have a guaranteed sale (if it’s a lease-purchase agreement). A more flexible seller might like the idea of a long-term renter enough to even go for a lease-option agreement. Still, get advice from a real estate agent, lender and lawyer. Credit implicationsRental payments aren’t usually reported to credit bureaus. However, if you’re trying to improve your score, and the seller agrees, you can arrange to have your payments reported so they will impact your credit rating. Make sure to keep track of all your payments, and get them in on time or early. Look at improving your credit during the term as your mission (or second job). Key terms and definitions
Rent-to-own pros
Rent-to-own cons
Best practicesBegin by obtaining a reputable real estate agent, lender and lawyer that you trust to help you review contracts. Make sure you have all your seller’s disclosures, including insurance claims and title information. Always insist on a complete home inspection from a professional. In conclusionWe hope we’ve made some sense of typical rent-to-own pros and cons, at least enough to help you wrap your head around this option. While you’re at it, you might also want to know a thing or two about home warranties. Don’t forget, our vast catalog of free posts on all sorts of DIY home ownership, improvement, maintenance and upkeep concerns is here for you anytime. The information in this article is intended to provide guidance on the proper maintenance and care of systems and appliances in the home. Not all of the topics mentioned are
covered by our home warranty or maintenance plans. Please review your home warranty contract carefully to understand your coverage. What is the downside of rentA major disadvantage of renting to own is that renters lose their down payment and other non-refundable charges if they decide not to purchase the home. Some sellers may even take advantage of renters by making it difficult or unappealing to purchase the home — with the goal of keeping the down payment.
Is it better to own your own house or rent?In general, the short-term costs of renting are lower than the costs of buying a home. Taking out a mortgage usually requires a down payment (usually anywhere from 3.5% to 20%), plus all the extra costs mentioned above. When you look at the big picture, a mortgage could be cheaper in the long run.
Is lease to own worth it?Rent-to-own may be a good option for those with low credit scores, because it gives you time to work toward improving your score before you need to apply for a mortgage. If you don't qualify for a mortgage right now, you can use a rent-to-own agreement to start working on buying a house sooner rather than later.
What is the biggest disadvantage of renting compared to buying a house?When it comes down to it, the biggest drawback of renting is that you're paying money that goes directly into your landlord's pocket. Even if they have to pay a mortgage on the property, they are still earning home equity as they pay down the loan principal and the property appreciates in value.
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