About Rent to Own Homes

For many people, the process of buying a house called "rent-to-own" is the best way for them to acquire a home. Basically, a person will pay "rent" to live in the home. After a certain length of time stipulated in the contract, he will have the option to buy it. Each month, a portion of the rent will be set aside for a down-payment that can be applied to the purchase.

Significance

For anyone having difficulty in saving for a down-payment to purchase a home, this maybe a viable alternative because she will be given more time to accumulate it. Also, owners of real estate that are having a hard time selling can find this device useful. That's because it opens the market up to people who would not otherwise qualify for conventional financing.

Considerations

The renter and the seller must realize that there are advantages and disadvantages to this type of program. For example, if a renter/buyer has a poor credit history, this arrangement will give him more time to fix it. Yet, the renter/buyer must pay the option fee upfront. Coming up with thousands of dollars may be a problem. Furthermore, the option fee is not refundable for any reason. So, if the renter/buyer is evicted along the way--or cannot purchase the property by a date set out in the contract--he will forfeit the option fee and the amount that has been set aside monthly for a down payment.

The seller, on the other hand, can apply the monthly payments to his mortgage, a particular advantage for someone unable to sell one house after purchasing another. Yet, if the renter/buyer fails to make the monthly payments, the seller will be forced to make payments on the mortgage or suffer foreclosure.

Prevention/Solution

It behooves both renter/buyers and sellers to negotiate the terms of this type of arrangement thoroughly. Those terms should then be set out in a professionally-drawn contract. Especially important are the penalties that the renter/buyer will suffer because of late payments. For example, many rent-to-buy contracts stipulate that any late payment will not result in an increase of the amount set aside for a down-payment. Furthermore, the contract should state clearly the responsibilities of both parties for repairs.

Time Frame

Lenders have gone through a turbulent time. They designed exotic loan products to reach a larger segment of the market, making rent-to-buy arrangements less attractive. With real estate prices falling, lenders have become very wary of loans requiring little or no down-payment. Most of them, once again, require that 5 percent or more be required. That situation has made arrangements like rent-to-buy very attractive as people look for new homes.

Theories/Speculation

Many people believe that rent-to-buy arrangements are only appropriate in cases involving both sub-standard buyers and rundown real estate. However, there are times when real estate is very slow to move. In addition, there will always be buyers who need a little more time to either accumulate a down-payment or to get his financial affairs in order. For those reasons, rent-to-buy arrangements can work to the advantage of both buys and sellers.

Resources

• More About Rent to Own