When a person buys a home, they meet with the seller in order to exchange funds and settle the final costs. Most people use a mortgage to pay for their home. The title is exchanged once the transaction is closed. There is an alternative to this. You can sign a rent-to-own agreement, which is also known as a lease-to-own agreement. This is a contract that allows a person to rent a home for a certain amount of time before purchasing it. People can also purchase the home before the lease expires.

This is not a common way to get a home. In fact, there are only a small percentage of properties that offer this program. Additionally, this program can put the renter at a disadvantage.

How the Process Works

A rent-own-agreement allows people to immediately move into the home. Every state has its own regulations. However, the person will typically rent the home for one to three years. There is a lot more to the rent-to-own process than just paying rent and then buying the home. The contract has several conditions that have to be met.



Option Money

In order to rent the money, people will have to pay a non-refundable lease option fee. Keep in mind that some contracts give people the option to buy the home, but they are not obligated to buy it. A person is free to move somewhere else if the contract does not specify that they have to buy the home.

The size of the option can vary. It can range from 2.5 to 7 percent of the purchase price. This means that if you are renting a home that cost $200,000 and the option is 7 percent, then you will need to pay $14,000. This is a lot less than the standard 20 percent down payment.

Purchase Price

The contract will state how much the purchase price is. In many cases, the seller and the buyer will agree on a purchase price when the contract is signed. The cost of the home may be higher than the current market value. The buyer and seller may also determine the purchase price after the lease expires. However, many people prefer to lock in the price of their home.

Rent

The person will be required to pay rent until the lease expires. A percentage of the rent will be applied to the cost of the home. This is also known as the rent credit. For example, the monthly rent is $1,000. Twenty-five percent of this may be applied to the rent.

If a person rents a home for 36 months, then he or she will pay $36,000 in rent. Nine thousand dollars may be applied to the rent credit. This helps the buyer with the down payment.

Maintenance

The terms of the contract can vary. In many cases, the buyer is responsible for maintaining the home. The buyer may also be responsible for insurance, property taxes and homeowners association fees. However, the seller may be responsible for these costs. The buyer may still need to purchase a renter's insurance policy. Make sure that you understand all of the maintenance and repair terms in the contract.

Purchasing the Property

The option will expire if one decides to not purchase the property. Any rent credit will be cancelled at this point. Legal proceedings may be initiated if there are terms in the contract that required one to purchase the property.

If a person wants to buy the property, then the seller will need to be paid in full. The rent credit can be applied to the purchase price. The buyer will become the homeowner once the transaction is completed.

Is Rent-to-own a Good Option?

A rent-to-own program is a good option if a person wants to buy a home, but they do not qualify for a mortgage. For example, you may not qualify for a mortgage if you have a low credit score. Most lenders require that you have a credit score of at least 620.

You can work on building your credit while you are doing a rent-to-own program. You need to make sure that you want to buy the home after you the lease is over. If you plan on moving, then this may not be a good option.