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What Is Rent to Own?

Rent to own is popularly known as a lease purchase. It is a binding agreement between a seller and a buyer (you) to buy a house or property with a future closing period, usually 1-3 years after the agreement is signed. Rent to own is a kind of contract that has been around for a while. You will probably be happy to know that the contract has been around for over two decades and two eras of family members.

The use of rent to own transaction started in Europe and the United Kingdom, and first showed up in the United States amid the 1950s and 1960s. While the term ‘rent to own’ is mostly used with consumer goods transaction, it is now becoming rampant in the world of real estate.

Why Are Rent to Own Transactions Becoming Popular?

Due to the mortgage foreclosure issues, banks have heightened borrower scrutiny. The rates of interest are closing on record highs and mortgage loans have been extremely uneasy for some people to afford. Banks are expecting people to have good credit score and longer work histories than what they had in past years, thus reducing the likelihood of homeownership for individuals who experienced foreclosure, bankruptcy, job loss and other credit ailments due to recessions.

So, the majority of people are now switching to rent to own contract due to the harsh requirements from many banks that make it difficult for some people to afford a mortgage loan. For instance, you may have an awful credit score (i.e. one that is less than 620, the absolute minimum that some banks or lenders will accept), but the conditions that diminished that score are fully dependent on you and you have been steadily enhancing it ever since. Perhaps the ratio of your debt-to-income is extremely high, yet not by much, and there is sufficient room in your financial plan to make extra payments and decrease your liability significantly in few years.

Likewise, you may have just gotten a great job with good pay, but you haven't been there sufficiently long for a lender to think of it as a steady income source to repay your mortgage loan over the long run. Also, you might be a successful sole-proprietor, but your track record isn’t good enough to be relied on by lenders. You may have started saving some funds, but you haven't amassed enough to meet the required 20% upfront deposit on a home. If you are faced with any of these conditions, then renting to own may be a great idea.

Benefits a Rent to Own Contract Offers to a Home Seeker

Rent to own offers many great benefits to home seekers. Discussed below are some of the benefits offered by the contract:

Equity Growth

The rent payments made by buyers will really go toward an investment. Monthly, a part of your rent is used to reduce the down payment of the house.

Minimum Expenses

When you purchase a home, you require an initial payment that is no less than 3.5% of the price tag of the home and also closing costs. Here, you will just pay an ordinary rental security deposit in addition to the option deposit (Deposit to have the option to buy the house by the end of the renting period)

Option Deposit is Credited

The buyer/tenant pays the seller/landlord an option deposit. This cash paid is a fixed interest on the price of the home and it will be totally credited when you purchase the home.

Flexibility

Restrictions are actually up to the seller, which implies that there could be greater flexibility with credit, and so on. You prove your capacity to buy by paying your rents monthly.

Control of the Home

The purchaser has total control of the home while making rent payments. You will get the opportunity to check out the nooks and cranny of the home, what ought to be changed, improvements, and so forth before the ownership is transferred to you.

Benefits of Rent to Own for the Homeowner or Landlord

Rent to own also offers many significant benefits to the landlord or seller. Discussed below are some of the benefits offered:

Higher Sale Price

More tenants who require slow-moving financing will be drawn to the home and they’ll certainly pay a premium due to the financing terms.

More Cash Flow

This is another good benefit that rent to own contract offer to sellers. It creates more cash flow. More value will result in more cash in hand. If you have a house you’ve been wanting to sell for a while but haven’t found a purchaser is better to rent it and make some money instead of just having it sitting there.

Higher Rent

You can request for a higher lease payment since you are flexible with regards to the financing terms.

Less Risk

The option deposit, which is non-refundable, is retained by the seller or landlord should the renter or buyer default or choose not to purchase. The seller also retains the monthly money (part of the rent) that was supposed to be used to pay for part of the down payment of the house if the tenant/buyer decides not to buy.

Real Estate Agent Aren’t Always Needed

Unless the homeowner places the home in charge of an agent, which could possibly be a smart idea to draw attention, the seller is offering the home by owner. It will save the seller from advertising costs and agent fees in the long run.

Disadvantages of Rent to Own for Tenants and Homeowners

If the tenant is just a day late on a rent payment for a particular month, most contracts render the rent credit for that particular month void. For example, a tenant is entitled to receive a $100 rent credit each month for 3 years. If the tenant is three times late in the payment of the yearly rent, toward the end of the rent period, the tenant would have $900 less for the initial down payment. If the tenant/buyer decides not to buy then the homeowner will have to start over the process of finding someone to sell the house to.

Conclusion

Rent to own contract is a very good way to own your first home. If you are struggling to meet up with your targeted credit rating and discover that securing a mortgage is extremely difficult for you, then you should consider looking at the likelihood of renting to own a home. However, ensure the agreement indicates what happens if the value of home fall or rise between the time the contract is signed and the time you go for a settlement. Finally, you need to hire an expert to guide you through the process of buying, especially if you are buying a home for the first time.





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