How the Agreement Can Benefit Both Buyer and Seller

Prospective homebuyers sometimes find themselves in the position of being emotionally ready to buy their first home but not quite financially prepared.

Whether the issue is a lack of down payment, a little too much debt, or a lingering ding on their credit report, sometimes buyers just have to wait while they work on their credit profile or save more money before they can buy a home. In such a case, a rent-to-own or lease-to-own arrangement can sometimes be a solution.

Rent-to-own agreements vary in their exact terms, but generally the property owners and renters sign a contract in which the renter agrees to rent the property for a specified time, typically one to three years. During that time, the renters usually pay an above-market rent, with the excess rent credited toward a down payment when the contract ends. The contract typically sets a price for the home at the end of the lease.

Benefits for Both Sides
A rent-to-own deal offers prospective buyers an opportunity to settle into a home they want to purchase while they continue to save for a down payment, improve their credit score, or wait for a negative factor on their credit report – such as a foreclosure or a collection – to fade into the past. Owners typically agree to a rent-to-own contract, or offer one, if their home isn’t selling fast enough and they’re motivated to move out.

Rent-to-Own Contracts
Both sides of the agreement must have the contract reviewed by a lawyer, because multiple issues must be addressed. Any lease agreement should include:

  • Length of the lease period
  • Rent amount
  • Rent credit for down payment and how it will be held until the time of purchase. Both sides need to agree in writing what will happen to the credit if the renters opt out of buying at the end of the contract.
  • Who will pay property taxes, insurance and homeowner fees during the lease period.
  • Who will pay for utilities, maintenance and repairs during the lease period.

Risks of Rent-to-Own
As a renter, you should weigh the option of a rent-to-own contract versus renting a less-costly home and saving money for a down payment on your own. Of course, if you love a house and are determined to buy it, a rent-to-own contract could be a good idea, even if it’s a little more> Make sure you understand when the title is transferred to you and who’s responsible if anything happens to the property while you live in it. It’s a good idea to have a home inspection before you buy the  property – even if you’ve been living there for a few years – so that you’re certain of its> Consult a lender to discuss the details of any rent-to-own arrangement, because in some cases a lender will consider the rent credit a seller concession that cannot be included as part of the down payment. If you’re concerned about home prices rising and want to lock in a home at today’s prices, a rent-to-own arrangement can work well, but make sure the contract specifies what happens if home values rise or fall between the time the agreement is signed and you go to settlement. This is one time when the assistance of an attorney who represents your interests should be mandatory.

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