When the market is saturated with homes for sale, rent-to-own becomes a popular option. It solves several problems for both the buyer and the seller. Rent-to-own is a contract to buy, but the closing date has been extended a year or two into the future. The renter has plenty of time to line up financing, and the seller gets his mortgage payments covered with rent in the interim.
Lease Purchase vs. Lease Option
Many people confuse lease purchase–aka rent-to-own–with lease option. There is a big difference. Lease option gives the renter the option to buy the home. The renter is not agreeing to buy it, but if a contract is offered, he may have first right of refusal. In other words, he should produce financing and close on a loan, or make plans to move out. A lease purchase is a contract to buy with an extended closing date. The time is used to save a down payment or to line up acceptable financing.
The buyer in a rent-to-own situation can freeze the price on the home a year or two in advance of when he must close on the mortgage loan. In the contract, he can list payments that will be contributed toward a down payment or toward the sale price. He can move in and try out the neighborhood–and the school system–prior to buying. The extended closing date gives the buyer plenty of time to clear up credit issues or to save down payment money. In the event he does not get financing, however, any deposits he makes up front may be lost.
The seller has the advantage of having a renter who is responsible enough to want to buy the home; therefore, he will take good care of it. The rents the seller receives cover all or part of his monthly mortgage payment. The seller also can require a nonrefundable deposit to bind the contract. If, at the end of the rental period as spelled out in the contract, he is not able to close the sale, it can be renegotiated or terminated.
When considering a lease purchase contract, take a look at your credit report to clear up any issues or to raise your credit score. Review the report for errors, duplications and outdated information. Dispute these items by contacting the customer service number on the report. Also, visit a mortgage lender and get pre-qualified for a loan. Even if you have no credit issues to clear up, debt ratios play a big part in mortgage approval. This meeting will show the amount of debt you can handle each month and still be approved for a mortgage. Down payments and loan types will be discussed, making you a well-informed future borrower.
Before paying any deposits, do homework to be sure the asking price is reasonable. Ask a real estate agent to do a “sold search” on the MLS to find what similar homes in the neighborhood are selling for. Have a real estate attorney do a title search for you to be sure the seller can pass clear title to you when you close on a mortgage loan. The attorney can also assist you with the contract. Make all payments to the seller in the form of checks. You must have absolute proof of timely rental payments to the seller, as well as proof of any deposits you made so that you can get credit for them from your mortgage lender. Hire an inspector to look over the home; he can ascertain any major construction issues. Major repairs should be negotiated with the seller before you sign a binding contract or pay a large deposit.