Pros and Cons Of Rent To Own Homes

 

Advantages & Disadvantages

Rent To Own Homes are not the perfect answer to owning a home but they can be a great option for those in the following situations:

• Past Credit Problems
• New Job or Short Employment History
• Cannot Afford A Substantial Down Payment
• No Credit History
• Self - Employed or Commission Income
• Legal Situations Such As Divorce

There are advantages in purchasing a home on a Rent To Own basis over a standard financed purchase or a rental. How much of an advantage depends on a variety of factors such as your personal situation, terms of the purchase, and the home itself.

Advantages

Immediate Occupancy

When financing with a lender is involved it can take from a week to as long as two months to actually move into your new home. Home appraisal, inspections, and gathering documents required by the lender can involve both time and expense that is not part of a Rent To Own home process. Normally you can move into the home as soon as you have paid your option fee and lease payment.

Easy Qualification

Lenders such as banks and mortgage companies have qualification guidelines that must be met by the applicant in order to issue a loan. These qualifications usually include a minimum credit score, debt-to-income ratio, minimum employment history, tax records, and affordability ratios.

With a Rent To Own home the guidelines are up to the current owner of the home and are usually more relaxed. The most important factors are usually the ability to pay the option fee, monthly lease payment, and possibly rental history.

Down Payment

In a lender financed situation you will be required to have your down payment in hand when you apply for the loan. Down payment requirements can be as high as 20% of the purchase price depending on the borrower and type of loan. With a Rent To Own home you can actually save your down payment while living in the home via the Monthly Rental Credit. When it is time to secure standard financing the owner can discount the home by that amount to provide you with an equity down payment.

Cleaning Up Your Credit

You can live in your home while you are in the process of improving your credit. If it will take three years to get your credit in shape then you should set your lease to coincide with this time period. Renting To Own let’s you move in while you are in this process while a standard lender would require you to meet those qualifications beforehand.

Try Before You Buy

Although you have made a partial commitment in the form of an Option Fee in some situations you may find that buying a particular home is not an advantage for you. Rising property taxes, undesirable neighbors, rezoning, declining property values, and ndisclosed or unknown major repairs are just a few situations that could affect your home purchase decision. With a Rent To Own home you can walk away at the end of your lease period. Remember that you will have to forfeit your option fee if you do this. In a standard lender financed situation you will have to sell the home to recover from an adverse situation.

No Closing Costs

Closing Costs are the expenses that you incur to complete a home purchase. These can include lender fees such as points and origination fees, title fees, appraisal fees, nspection fees, etc. These costs often amount to thousands of dollars. Although you will have to pay these costs if you ultimately decide to purchase the home, you will avoid them when you move in.

Maintenance

Who pays the maintenance costs during the lease period is a function of your lease agreement. It is a huge advantage for you to have the landlord pay these unexpected and sometimes costly expenses. At a minimum you should require the landlord to pay any major maintenance costs.

Disadvantages

Although a Rent To Own home have advantages they also have disadvantages.

No Interest Deduction

During the lease period of your Rent To Own purchase you will not receive the home mortgage interest deduction that you would if you were financing your home through a standard lender. This may or may not be a disadvantage depending on the amount of itemized deductions that you have versus the standard deduction that you are allowed.

Higher Sales Price

Some sellers may want a higher price for a Rent To Own buyer than a cash buyer. Remember that everything is negotiable when you are purchasing a home whether it is a Rent To Own home or a cash purchase. You do not have to pay a higher price. There are a lot more homes for sale in this market than there are buyers so go into your negotiations in a strong position.

Owner Title and Liens

With a lender financed purchase it is customary to use a title company or attorney to verify that the property has a title that is free of liens and other encumbrances. In a Rent To Own situation you are responsible for researching this information.

Lease Cancellation

If the seller cancels the lease due to late payments you can also loose your option fee if it is part of your lease. Making the Purchase Option a separate agreement may avoid this and also may provide you leverage in this situation to continue the lease agreement or negotiate a better deal.

Death Or Disability Of The Seller(s)

The Rent To Own agreement should contain provisions that would come into play upon the death or disability of the seller(s). In some cases this situation can be covered by insurance.

Major Improvements Become Seller’s Property

Although a Rent To Own home may be a great path to ownership in many situations it may not be advisable to make major improvements to the property during the lease period. If the option to purchase is not exercised or the lease is cancelled improvements that you have made will probably become the property of the seller.

Unknown Transfers

Your agreement should stipulate that the landlord / seller will not transfer title to the property while your agreement is in effect. You may also want to be notified in the event of any additional encumbrances on the property. Knowing your seller is very important in a Rent To Own purchase.