An Introduction to Rent-To-Home Contracts

There are numerous paths to homeownership. In today’s market, your choices in homeownership may be limited if you are short on cash or have poor credit. An option you might want to consider are rent-to-own homes. Rent-to-own homes allow you to continue renting, while working toward your goal of homeownership.

A rent-to-own home is an opportunity to rent a home with an option to purchase the home at the end of the lease. A rent-to-own contract, otherwise known as a lease-option agreement, contains the terms that are agreed upon between the seller and the buyer. Upon the signing of the agreement, you will be on your way to the exciting journey of owning your very own home.

Below are typical elements found in a contract:

  • The Purchase Price is pre-determined and locked-in at the time of the signed contract. However, the value of the home may fluctuate due to the housing market.
  • An Option Fee, also known as the down payment, is paid up front. Typically, it is between 2.5 percent to 7 percent of the purchase price. If you choose not to purchase the home, your option fee is forfeited. Otherwise, the option fee is allocated towards the purchase price.
  • The Lease’s Duration is agreed upon at the time of the signing of the contract. Typically, the duration of the lease is two-to-five years.
  • An Escrow is established for the option fee and the agreed upon percentage of the monthly rent. The money goes towards the purchase price.
  • Your Monthly Payments will be allocated towards the purchase price.
    • An example: If your agreement is for a five-year period, and your rent is $1,500 with 25 percent allocated towards the final purchase price, at the end of your term you will contribute $22,500 towards your final purchase price.
  • The Maintenance responsibilities and upkeep of the home will be detailed in the agreement.
  • The Eviction Process will be specified and initiated if the tenant does not pay rent or for any other valid reasons.

Differences Between Purchasing a Home, Renting-To-Own and Renting.

  • A rent-to-own home differs from traditional home buying, primarily in the way the transaction is financed.
  • If you were to purchase a home, you would typically be required to provide at least a 20 percent down payment upfront. However, 2.5 percent to 7 percent of the option fee would be required for a rent-to-own home.
  • In a rent-to-own home, your rental money would act as equity. A percentage of your rental payments would go towards the final purchase price and act as your down payment.
  • To become a homeowner, you are expected to qualify for a mortgage and pay monthly payments immediately. In a rent-to-own home, you would not need a mortgage as quickly. This gives you more time to improve your credit and qualify for a mortgage.
  • Buying a home will force you to start taking on the financial responsibilities of being a home owner. Agreeing to a rent-to-own home provides additional time to prepare for purchasing the home.

Another option you may want to consider is renting a home. Spending money on monthly rent may not be your best choice. At the end of your rental period, you will not gain any equity. The rent or buy calculator found at the New York Times website might help you in your decision-making process when considering what is best for you when you are seeking out a new home.

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