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How does a rent-to-own transaction work?

If you have heard about renting to own a home, and are not sure what it is or how it works, then read this blog. Lets start by saying what it is not: Renting to own a home is actually a misnomer. It implies that you rent for a period of time and then you own the home. This is not the case. Renting to own a home is a lease with a difference – you have the option to buy the home at any time during your lease period.

The Difference Between Renting And Renting To Own

Rent Rent To Own
Rent money is lost forever. A portion of your rent goes towards your down payment or the price –
kind of like a savings account. This is called a rent credit.
Your landlord does not want to sell the home. You don’t so much have a landlord as you have a seller whose intent is to sell the home to you.
Purchase price is never discussed, since the home is not for sale. The price you will be buying the home for is set at the beginning of the lease in the form of an option to purchase.
Landlord is responsible for all repairs. You are responsible for the repairs since you are a home owner to be. This is the house you want to buy and therefore you are treated like a home owner.
Rent is set at market rates Rent may be slightly higher than market rates since a portion of it is going toward the down payment or reducing the sales price. This allows you to build equity while you are getting ready to buy.
A security deposit, first month’s rent and sometimes the last month’s rent will be required to move in. The security deposit is refundable in case of no damage to the home. A down payment, called “option consideration”, will be required. This will lock your option to purchase on the property, and will go toward the purchase price as a down payment. This is not refundable if you choose not to buy by the end of your lease. First month’s rent, and sometimes a security deposit will also be required.

When Does Renting To Own Make Sense

If you are tired of renting and want to purchase a home, but your credit, income situation or other factors will not allow you to qualify for a home mortgage right now, then renting to own is for you. If insufficient credit is holding you back, then you need some time to fix it. By doing a rent to own home transaction, also known as a lease option or lease purchase transaction, you get to live in the home you want to buy right now while you work on getting your credit fixed.

When You Should Not Do A Rent To Own Home Transaction

There are times when entering into a rent to own home transaction is a bad idea. You don’t want to lose your option down payment because you were not prepared to purchase the home. Here are the top five situations when you should not be doing a rent to own home transaction

If you don’t have the discipline to change your financial habits if bad credit is the problem
If you are not prepared to do what it takes to get ready for a mortgage eg. credit repair, setting up trade lines, paying rent on time
If you are not sure that this is the right home for you
If you don’t know how long you will stay in this town because of job or family reasons
If you don’t have a steady income. Your mortgage will not be approved without a stable income source

2 comments. Leave a Reply

  1. thanks for share!

  2. Interesting^^

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