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Is 'Rent to Own Homes' Right for You?

While housing prices and interest rates may be low, making now an ideal buyer's market, many people are discovering that home ownership remains an elusive dream. The most common reason is that although the inventory of homes for sale remains large, the amount of available financing has become significantly restricted. In the aftermath of the housing crisis, many lenders dramatically restricted lending guidelines and raised credit score requirements. As a result, prospective homebuyers that might once have easily qualified for a home loan under the old lending guidelines are now no longer able to qualify for a mortgage. Where does this leave the average home buyer that might have a few flaws on their credit record or who may be able to afford a mortgage payment, but who doesn't have the required down payment? For many such prospective homebuyers, rent to own might be a viable solution. Before considering whether this is the right option for you; however, it is important to consider both the pros and the cons.

First, it is important to understand what rent to own really is and what it means to you as a prospective home buyer. Rent to own homes is also sometimes referred to as an option to buy or lease purchase. Although it sounds like an easy way to purchase a home, the reality is that it is often more complicated than many people imagine. The common perception is that you can rent a home and all of the rental money will be credited toward the purchase of the home and before long you'll have it paid for.

The reality is that what you are actually buying is the right to purchase the home at a later time for a specified price. You are still responsible for making a down payment on the home and monthly payments, which are typically going to be higher than what you would pay in that market for rent. The reason is that part of the monthly rental payments will go toward your option to purchase. For example, if you pay $2,000 per month and the average rent in that market is $1,800 then $200 will be credited toward the down payment when you decided to exercise the option to purchase the home.

The amount of time period for the lease can vary. Technically, the lease can be written for whatever period of time you and the owner of the property agree upon. Whatever time period that may be, this will be the option period. Once you have signed the lease, you will also sign a contractor with the owner of the property. This contract is similar to that of a regular lease, but the exception is that the contract will contain the option clause. The option clause specified in writing what will occur if you do not exercise the option at the end of the option period.

In many cases, if you choose not to purchase the home all of the additional rent that you have paid as well as the down payment will remain with the owner. Naturally, this is a disadvantage for you and an advantage for the owner. The benefit to you is that you are able to guarantee the purchase price and it will remain locked-in until the option period expires. Consequently, if that market becomes extremely desirable, you have a locked-in price and the owner will not be able to raise it. Another benefit for you as the renter is that you will be able to establish a payment history for the period of time that you are renting the home and this can sometimes make it easier for you to qualify for a loan.

Clearly, there are advantages and disadvantages to a rent to own situation. If you are considering purchasing a home, this can be a good way to slowly transition into it. On the other hand, if you choose not to exercise the option to buy or if you are not able to get a loan at the end of the option period, you could stand to lose money.

If you decide to try a rent to own homes, always make sure you have an experienced attorney review any contract before you sign it. Make sure as well that you understand all of the details of the contract before you agree to it. Renting to own can offer benefits, but only if you understand exactly what you are getting into before you sign on the dotted line.



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