By Admin
22 December, 2022
Lease-to-own or rent-to-own agreements are leases with the option to buy at a later date. In most cases, you’ll have three years to buy the house or condo. Usually, the price is set at the time the agreement is signed. It can also be determined by when you’re ready to buy. It depends on the contract. Sometimes the lease-to-own agreement has an option fee. The option fee is an upfront payment that will go towards the down payment.
What’s required?
You will pay more than the market rental rate for the property you are renting. Anything paid above the market rental rate is applied to the down payment. For example, if the market rental rate is $1,100 per month, your monthly payment might be $1,500. Of that amount, $400 per is set aside for the property’s down payment. Over three years, that extra $400 would grow to $14,400, roughly a 5 percent down payment on a $300,000 home.
The lease-to-own agreement can be broken into two parts: the lease and the option to purchase.
The lease includes:
- rental payment amount
- due date
- penalties
- approval for pets and other obligations
The option to buy the property includes:
- purchase price
- number of months to complete the purchase
- the way the extra payment will be applied towards a down payment.
Don’t confuse a lease-to-own agreement with a lease-purchase agreement. In a lease-purchase agreement, you’re required to buy the property (even if you can’t qualify for a traditional mortgage).
When does it make sense?
Lease-to-own is a good option if you need time to improve your credit or save for a down payment. During the term of the agreement, you can pay off debt and resolve credit report errors. This will help you qualify for a loan and secure a better mortgage rate. The arrangement also allows you to save more money towards a down payment.
Additionally, a lease-to-own agreement locks in your purchase price. When the housing market is strong, you’ll pay less than the market value for the property. (Of course, this can work against you if the housing market crashes. You’ll end up paying more than market value for the property.)
For a lease-to-own agreement to make sense, you have to plan to live in that house or condo until you buy it. If you leave before then, you will lose any option fee you paid upfront, which is usually 1 to 5 percent of the sale price, plus whatever money you paid extra every month towards your down payment.
What are the risks of lease-to-own?
The most obvious risk you’ll face is losing the option fee you paid upfront and the money you’ve paid towards your down payment. You’ll lose both if you break your lease or fail to buy the home by the agreed upon date. One way to minimize that risk is to get pre-approved for a mortgage at the purchase price stated in the lease-to-own agreement before you sign it. But that’s not always an option, especially if you are entering the arrangement so you’ll have time to qualify for a loan.
Additionally, you can also forfeit your money due to a breach of contract. That breach can range from failing to pay your rent on time to having a party deemed to violate the noise clause in your lease. Some landlords offer these arrangements hoping you’ll breach the contract because he is collecting several hundreds of dollars more per month than what he could get otherwise. Avoid this scenario by having an emergency fund to cover any month where you find yourself coming up short. Don’t pay late.
You’ll also want to watch for clauses in the lease-to-own agreement making it your responsibility to cover maintenance expenses or repairs that would normally be the landlord’s responsibility. If the home isn’t in good condition, you could be on the hook for a costly expense like a new A/C unit or roof. Failure to make the repair could result in a breach of contract and the loss of your money.
Finally, make sure the contract will be acceptable to the mortgage lender you hope to use. Depending on the contract’s wording, some lenders won’t recognize the down payment accrued through the agreement.
Steps you can take to minimize risk
If a lease-to-own agreement sounds like a good option but you’re worried about the risks associated with it, you can take some steps to minimize them. Start by having an attorney, real estate agent, accountant or all three review the contract before you sign. Make sure you understand your rights and obligations.
Next, do your own research. Know the terms of the contract and how much of the rent goes towards your down payment every month. Take the time to find out who is responsible for fees like homeowners’ insurance and property taxes. Make sure the term “maintenance” is clearly defined.
Additionally, you’ll want to approach this as if you’re buying the home because you eventually are. Get an independent appraisal, have the property inspected and check to see that the property taxes are up to date and there are no liens on the property. Just to be safe, look into the seller, too. Search to see if he has complaints lodged against him with the Better Business Bureau or if they are being sued over real estate transactions. Obtain a title report to see how long they have owned the company and run a credit check to see if they are in any financial trouble.
It’s better to find out about potential problems before you sign the lease-to-own agreement rather than later when the landlord has several thousand dollars of your money.
Alternatives to lease-to-own
If you want to own a home but don’t like the risks associated with lease-to-own agreements, you have other options. Start by researching loans. Most people think in terms of conventional mortgages that require 10 percent down, but you may qualify for a VA home loan where you don’t need a down payment or an FHA loan, which requires only 3.5 percent. Meet with a mortgage broker to discuss your options.
Seller financing is another possibility. With seller financing, the seller acts as your lender. You purchase the property upfront and make monthly payments to the seller until you pay off the loan, refinance it or sell the property. But the loan may be significantly shorter—maybe only a few months or years—than a conventional loan, and your interest rate could be much higher than the federal rate if you go this route.
Finally, you don’t need a lease-to-own program to help you improve your credit or save the money for a down payment. Do it yourself. Pay off your debts, avoid making large purchases (like cars) and set aside a few hundred dollars every month until you have enough. One of the advantages of this approach is that you’re not tied down to a single property as you would be if you signed a lease-to-own agreement.
Helpful Articles
Preparing for a Commercial Move
Why You Should Work With a Mover
Use a Mover Using Newer Software
Moving Software
The revolution of moving software
tips Localmoving Newhome Moving
