Homebuying Resources

One of the many factors of what makes certain cities and neighborhoods “hot markets” is the school district, and that very factor also plays a role in purchasing a home for many Americans looking to start a family or already have children. After losing bidding wars on hot homes in desirable neighborhoods, so many throw in the towel and resort to paying rent in hopes ANY home will hit the market soon.

If you’re one of the families resorting to renting just to stay in the neighborhood with the best school district, you may be forgetting about one very important, and more desirable, option: rent-to-own.

Here are the answers to 5 frequently asked questions about renting to own your next home:

FAQ #1. What does it mean to rent to own a home?

When doing your research, you may come across other terms also describing a rent-to-own property/contract, so keep an eye out for these:

  • Lease-to-own
  • Lease with option to buy
  • Lease-purchase contract

When renting to own a home, the renter of the property pays the landlord rent while a portion of the monthly payment may go towards the down payment on the home in the event the renter wants to move forward with the purchase when the lease term is up. The tenant usually pays rent for at least 12 months; though, your terms will vary depending on your specific agreement with the seller.

FAQ #2. How does the rent to own process work?

Not all single family homes for rent will be rent-to-own properties, but the best part about it is it’s negotiable, especially when the landlord is making extra income for the time you are renting. No two rent-to-own contracts are the same, and there are a few ways the rent-to-own process works, but here are the 2 most common:

  1. A portion of your rent is applied towards your down payment –

In this particular case, the future buyer of the property pays rent (renter), usually monthly, to the owner of the property (seller) for a period of time negotiated in the contract. A percentage of the rent payment also negotiated in the contract is then applied towards the down payment, called a rent credit. The renter usually pays rent for 1-3 years, depending on the contract, PLUS the added rent credit. When it is time to purchase, the money paid in rent credit be used as down payment funds. Now, let’s do the math:

  • $1,200 (monthly rent) x 25% (percent used as rent credit) = $300 (monthly rent credit)
  • Your total rental payment per month will be $1,500
  • $300 (rent credit) x 3 (# of years paying rent) = $10,800
  • You will have $10,800 to use as a down payment

2. A portion of your rent is used to buy down the sale price –

Using this option as a part of your contract works about the same way as the option mentioned above, however, the percentage of rent credit will be used towards lowering the sale price of the property being sold. What’s the difference? With this option, you will still need to come up with the down payment. Here’s an example using a $250,000 home:

  • $1,200 (monthly rent) x 25% (percent used as rent credit) = $300 (monthly rent credit)
  • $300 (rent credit) x 3 (# of years paying rent) = $10,800
  • $250,000 (sale price) – $10,800 (rent credit) =
  • Your loan amount will be $239,200

Note: Before deciding if renting to own your first or next home, make sure you fully understand ALL components of a lease-purchase contract. Discuss the option with a real estate professional, such as a real estate agent or mortgage consultant first.

Ask a Question

FAQ #3. How do you negotiate a lease with option to buy contract?

Negotiating a rent-to-own contract on a single family, town home, or condo might sound intimidating, but with the right real estate agent and following these 7 steps, you’ll have just the right guidance you need:

  1. Start with a mortgage calculator and get a pre-approved amount from a mortgage consultant to make sure you stay at a comfortable price point.

Get Pre-Approved

Pre-approvals are free and are at no obligation to you. There’s nothing worse than going through the hassle of the negotiating a contract and finding out you can’t afford it.

  1. Not only are real estate agents knowledgeable about the process, they’re pros at negotiating. They will be at your side or there to do all the dirty work for you. Not to mention, they know plenty of facts about the market, neighborhood, and other important factors you need to know before making a move on a rent-to-own home.

About the Author

Anthony Cummuta

Director

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