If you are like one of the many aspiring homeowners out there, you have been dreaming of the day you will finally have a place to call your own. But, according to Bankrate, about a third of all purchasers are denied for a mortgage. If done right, rent to own can make the home buying process easier for buyers who are unable to get approved for an affordable mortgage.
But where should you start?
First, it is important to understand there is more than one way to rent to own. Basically, rent-to-own includes turning an up-front amount of cash or portions of monthly rent payments into your future down payment to help achieve homeownership (or both). If you are asking yourself: what does rent to own mean? or, how does rent-to-own work? continue reading...
Is rent to own a new idea?
The idea is not new. Buyers and sellers have been using rent to own agreements for decades. However, recent changes to lending standards and loan processing have made it more challenging for many aspiring homeowners to secure an affordable loan, and rent to own has become a promising alternative.
What are the key documents in a rent to own agreement?
There typically would be two key documents of a rent to own agreement:
- A Lease Agreement that includes the monthly rent payment, length of your lease term, and other customary rental agreement provisions.
- The Option to Purchase Agreement, which gives the tenant-buyer the right to purchase the home at an agreed upon price at any point prior to the expiration of their lease agreement or another agreed upon date. The Option to Purchase also would include the Option Fee, or cost to have the right to purchase at a price that can't change during the term. In some cases this Option Fee is applied towards the purchase price if you decide to purchase the property. The Option to Purchase may also include a Rent Credit that builds over the rental period and is applied to the purchase price if you decide to purchase the property.
At Strong Blocks, 100% of the Option Fee, or Rent-to-Own Fee, goes directly towards the purchase price when you decide to purchase as part of the up-front Cash for Keys payment. The Cash for Keys payment includes the first month rent, security deposit, and the option fee (we call it Rent-to-Own Fee). Typically, the total Cash for Keys payment is between $3,000 and $4,500 depending on the monthly rent and sale price of the Strong Blocks house you choose. It is paid after the family qualifies, but before moving into the property.
In order to keep the rent affordable during the rental period, monthly rent is typically rent only, without monthly credits towards the purchase price unless a family decides they would like to spend more monthly to increase their downpayment. We do not recommend paying a larger amount each month as it puts more money into your investment before the actual purchase (creating more risk to the buyer). Instead, save this money in a savings account to build up personal savings for your family's future.
What type of potential buyers choose the rent to own method?
Rent to own buyers have historically included the following:
- Renters who want to improve their personal finances (i.e. save more money, establish credit, and restore any credit problems) over the course of a rental period to be able to qualify for an affordable mortgage at the end of their lease
- Renters who are unable to qualify for the best mortgage rates and terms available due to credit or personal finance issues
- Renters who are tired of renting and want to take positive steps towards home ownership.
Who pays the real estate taxes and homeowner insurance on the rent to own home during the rental period?
Property taxes and homeowner insurance are typically paid by the seller of the rent to own home until the family completes their Buying Plan and purchases the property. If you are considering rent-to-own programs outside of Strong Blocks, be sure to ask this important question since these costs can add up.
Besides a rent to own agreement, what else is important?
Be sure you have a Buying Plan that will support mortgage qualification by the time the rent to own period ends. Fortunately, since most Strong Blocks rent to own agreements will run 21 months, there is enough time available for those needing to repair or establish credit. By working directly with an experienced Housing Counseling agency, you will also have access to obtaining your Buying Plan and credit scores along with credit repair and homebuyer counseling services.
What is the difference between rent to own, lease option, lease purchase, rent to buy, owner financing, and land contract?
- Lease option transactions are also known as rent to own, or rent to buy transactions. In a lease option, the landlord-seller leases the home to the tenant-buyer and the tenant-buyer has the option to purchase the home for a set price at any point before the end of the lease. The main components of a lease option transaction are the rental terms, the purchase price, the down payment, the ability to extend deadline to purchase, and, if applicable, the rent credit.
- Lease purchase transactions are similar to lease options; however, rather than granting the tenant-buyer the option to purchase the home, lease purchases contractually obligate the tenant-buyer to purchase the home.
- Owner financing agreements and land contracts have similar payment schedules to that of lease options and lease purchases; however, these agreements enable the buyer to purchase the home and obtain title at the beginning of the transaction. The seller, instead of receiving a large cash payment at the time of purchase, as he/she would in a conventional sale, serves as a lender for the remainder of the agreement, and collects monthly financing payments from the buyer. When the owner financing agreement or land contract expires, the buyer would obtain third-party mortgage financing if they still need additional funds to fully repay the seller loan.
Most importantly, be aware that not all rent to own deals are created equal. Thoroughly read the contract before you sign and don't be afraid to ask questions, you have a right to know what you are getting into.
At Strong Blocks, we offer a rent-to-own program that allows you to qualify for an affordable, low-cost mortgage in 21 months or less. With our program, your family can work with a team of experts that includes a bank, realtor and financial coach. All of our rent-to-own homes have been remodeled by professionals and are in move-in condition.
Written by Mary Leach-Sumlin, Any House Realty
Mary Leach-Sumlin is the owner/Broker of Any House Realty, which she founded in 2017. Prior to launching her own real estate firm, Mary was a Realtor for ACTS Housing since 2007, and then the Managing Broker. She has an office located inside St. Martin de Porres Parish on 2nd and Burleigh. She holds the Accredited Buyer's Representative designation. She has helped more than 200 families achieve their homeownership dreams. You can email her at email@example.com