One way to become a homeowner is to take the rent to own route. To see if this is your best bet for buying a home, we’ll reveal several details about this unique method you may not be familiar with.
Reasons To Buy A Rent To Own Home
A rent to own agreement can be beneficial for various situations, such as:
- You feel as if you are wasting your money paying rent each month.
- You want to become a homeowner.
- Your credit score is low, and you want to improve it.
- You do not feel you could get approved for a mortgage right now.
- You lack sufficient cash for a down payment.
If any of those describe your current situation, then a rent to own agreement could fit your needs, as it can help you transition from renting to homeownership, but there are a few things you must consider first.
Questions To Ask Yourself Before Jumping Into A Rent To Own Agreement
Can a rent to own agreement help you become a proud homeowner? Sure, but you should ask yourself these questions before entering into one, as it may not be for everybody.
1. Can I afford an upfront fee?
Have you ever paid a security deposit before moving into a rental? With rent to own, you’ll have something similar, and it’s called an option fee. Like a deposit, you have to pay it before moving in. Unlike a deposit, the option fee is not refundable, but it could go towards the down payment or purchase of the home later on.
The option fee acts as an incentive to the owner to sell you the property once your lease is over. You could think of it as a way to secure the property so nobody else can buy it before you.
While negotiable in many cases, the option fee can be pricey, as it’s usually around 1-7 percent of the property’s purchase price.
2. Can I afford a higher payment each month?
Let’s say the property owner lets you rent their unit for $1,000 per month. In a rent to own deal, that number will likely grow higher, to something like $1,200 per month. $1,000 will be the rent payment, while the extra $200 goes toward the rent to own agreement. And some of the $200 will go to the landlord as an incentive for accepting the agreement, while the rest could be converted into credit toward purchasing the home later on.
3. Can I pay on time?
A late payment in a rent to own agreement can be costly. Unlike a standard rental agreement where there may be a late fee, not paying on time here could result in you losing any credit you’ve accumulated towards buying the home.
Besides avoiding that loss, there’s another reason to pay on time: It can build your credit so you can increase your chances of qualifying for a mortgage in the future.
4. Can I afford repairs?
Some landlords will not pay for repairs and maintenance in a rent to own agreement since they know they may lose the property once it’s over. Keep this in mind if you don’t have a ton of savings for emergency repairs.
5. Can I take a loss on the home if I buy it?
When you enter a rent to own agreement, the purchase price is settled and equals the current value of the home. If the value goes up in the future, you could enjoy a nice gain on your investment. But if it goes down, you could end up overpaying.