Rent
To Own Homes
Although
there is no standard for a Rent To Own Home Agreement, many contracts
contain common provisions. In general a Rent To Own Agreement allows
a tenant to become a homeowner if certain conditions are met. Those
conditions usually require the tenant/buyer to pay an initial Option
Fee and a monthly lease payment for a specified period of time.
At
the expiration of the lease period the tenant has the option to purchase
the home for a specified amount. Financing the purchase at this time
requires the tenant to secure a loan through a bank, mortgage lender
or other outside source.
The
Lease Option
The
Lease Option is a term that actually would be better described as the
Purchase Option. This can be contained within the Rent To Own/Lease
Agreement or exist as a separate contract. This provision normally
stipulates the tenant/buyer's right to purchase the home for a specified
amount at the end of the lease period. There is usually a fee attached
to this known as the Option Fee.
The
Option Fee
Although
the Option Fee is normally paid at the beginning of the lease period
it should not be confused with a Rental Security Deposit. The Option
Fee is a fee paid for the right to purchase the home. It is usually
not refundable. In some cases it may be applied as a credit towards
the purchase price of the home.
Monthly
Rental Credit
In
many cases Rent To Own Agreements will contain a provision that designates
a portion of the monthly rental payment as a credit towards the purchase
of the home. This amount varies and can be as high as 50% of the payment.
The
advantage to the tenant/buyer is the ability to begin building equity
in the home during the lease period, usually at a faster rate than
a standard mortgage. It is important to note that if the option to
purchase the home is not exercised that the credit is lost.
Hypothetical
Example
Our
example illustrates a home with a selling for $200,000. A 3% Option
Fee would equal $6000. This amount is paid at the time that the lease
begins.
The
monthly payment on the home in this example is 1% of the selling price.
This generates a monthly payment of ($200,000 x 1%) or $2000.
In
our example the investor is going to allow 30% of the monthly payment
to be credited towards a down payment on the home when the buyer purchases
it. The down payment credit would be ($2000x 30%) $600 each month.
We
will assume that the rental or lease period is 24 months. In this case
the buyer would pay a $6000 non-refundable Option Fee. They would pay
24 payments of $2000/month . At the end of the 24 month period the
buyer would have the option to purchase the home for $200,000. During
the lease period they would build up a total down payment credit of
$14,400 ($600 x 24 months). At this time the tenant/buyer would need
to secure financing to purchase the home from a bank, mortgage lender
or other source.
Things
to Consider
A
Rent To Own Home can be a great way to start on a path to home ownership.
The down payment can be made gradually via the Monthly Rental Credit
during the lease period. Qualifying for a Rent To Own Home is based
more on the ability to pay rather than credit scores. Another advantage
is the ability to "Try Before You Buy".
Keep
in mind that if you do not to purchase the home at the end of the
lease period you can lose your Monthly Rental Credits. At this time
your credit
must allow you to qualify for a mortgage. Considering this fact
it may be an advantage to monitor your credit though a reputable and
established
credit repair resource
