UNDERSTANDING RENT TO OWN OPTIONS

For those who can't qualify for a mortgage, there is another option for achieving the dream of becoming a homeowner. Renting to buy is an option that isn't common but is obtainable with the proper research and invested time. Renting to own is similar to signing a lease.

However, there is a clause in the contract that gives the buyer the opportunity to purchase the home later. If the renter pays on time and works to improve a derogatory credit history report, the option to buy is feasible. Some renters can also build option credits toward their future home purchase.

Understanding the Lease Option.

The lease option allows a renter to build equity in the home before buying it. For example, if monthly rent payments are $500 and the home's sale value is $75,000, the renter would build around $5,000 in equity during the first year of renting with an option to buy. Usually a portion of the rent goes toward paying for the home. However, not every penny may be applied.

There are several different ways to set up a lease with an option to buy. It's already been explained that the amount of rent applied toward the purchase price will vary based on an individual contract. However, some sellers may also require an option fee, which is paid up front in a lump sum. It's best to avoid paying an option fee that is 1% or less of the purchase price. The funds should be held in escrow. If the seller backs out, the fees should be refundable. However, they might not be refundable if the renter backs out of the deal. Although the option period doesn't usually exceed three years, some sellers might grant a longer period.

Know the Seller.

One of the riskiest parts of the rent to own option is that the seller might have financial difficulties in the future. These difficulties could cause the lease option to be worthless later. For example, if the seller is still paying a mortgage on the house and experiences financial difficulty, rent checks intended for an equity payment might be held and not applied toward the balance. If the lender goes through foreclosure, the buying option is lost, together with the residence itself, which the bank will demand be vacated by the occupants. If there is a mortgage on the home, it's best to ask the seller to sign a mortgage authorization form. This form allows the buyer to contact the lender to obtain current information about the loan.

Valuable Tips to Consider.

Always ask the seller what the reason for selling the home is. Be wary of sellers who express difficulties in paying the mortgage. It's important to know what types of disclosures sellers are required to provide in each state. Individual state regulations vary on this subject, so it's best to contact an agent to learn what real estate attorney is best to speak with about the matter.

It might also be necessary to have the home inspected. If repairs are necessary, negotiate them with the seller during the rental period. Although it might not be possible to arrive at a specific purchase price for the future, avoid vague wording. For example, if a contract says that the home will be purchased at market value in the future, don't sign it. It's best to have a ballpark figure or range of specific figures.

To learn about more valuable tips for setting up one of these contracts and purchasing proper insurance for the dwelling, contact our office today.
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Further Reading
For those who can't qualify for a mortgage, there is another option for achieving the dream of becoming a homeowner. Renting to buy is an option that isn't common but is obtainable with the proper research and invested time. Renting to own is similar...
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