To do that, start by verifying their income and work history. The general rule is that no more than a third of income should go toward housing, Orefice said. Also confirm that the buyer has a plan in place to save enough for a down payment and closing costs and to fix any credit issues that could stand in the way of qualifying for a mortgage.
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If you are the buyer, you need to make sure that the seller is indeed the owner of the house and that there are no outstanding liens or judgments against the property that would interfere in transfer of ownership. Additionally, you should have the home inspected just as you would any home you are thinking about buying.
How Does Rent-to-Own Work?
Sometimes, the seller will ask the buyer to pay what's called an option fee. This chunk of money, which amount can range from almost nothing to up to 5 percent or 10 percent of the purchase price, gives the seller the exclusive right to purchase the home. If the buyer walks away after the rental period, the option fee is typically forfeited. If the buyer follows through, the money goes toward the purchase price. Buyers should make sure under what circumstances this fee could be forfeited during the rental portion of the deal.
Orefice says to read the contract carefully, because it could state that if rent is paid more than a set amount of days late — sometimes as little as 10 days — the option fee will be forfeited. One common aspect of a rent-to-own arrangement is for a portion of the monthly rent to go into an escrow account until the date of purchase, at which point the saved-up amount is used toward closing costs or a down payment.
If the buyer walks away, the money is forfeited. In these cases, the rent is higher to accommodate that escrowed amount.
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Orefice said he's also seen cases where the seller matches the monthly escrowed amount for the buyer. Make sure it's clear who is insuring the property. Even if the seller continues paying homeowner's insurance during the rental, the tenant should have renter's insurance to protect their belongings. Likewise, make sure the rental portion of the contract outlines exactly who is responsible for maintenance and repairs on the property. If you're caring for Mom or Dad, your own retirement is in danger 5 tax software options for do-it-yourself filers New tax law is a mixed bag for your company benefits.
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The rent-to-own also allows the buyer to determine if he actually likes the house and neighborhood before buying it. Leasing to own can be a good option for an owner who is having trouble selling the home using conventional methods, perhaps due to adverse market conditions. An investor with a several homes can also use lease-to-own as a way to sell the properties at attractive prices and earn some income along the way.
Rent-to-Own Homes: How the Process Works
Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch. Plaehn has a bachelor's degree in mathematics from the U. Air Force Academy. However, most rent-to-own transactions involve these components:. Purchase price. The rent-to-own agreement will specify how and when the purchase price is decided.
In some cases, the price becomes official when the buyer and seller sign the contract. Rent payments.
Rent-to-Own Homes: How the Process Works
These payments are typically higher than rent prices in the area because a percentage of each payment is set aside as a credit for your future purchase of the home. You could be on the hook for everything from landscaping to a broken air-conditioning unit. Option money. Lease term. You and the seller will agree to a specific lease term in the contract. Closing process.
The terms are completely negotiable. Sounds like nothing can go wrong here, right? You build a down payment over time.
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Instead of having to fork over a significant down payment when you move in, you build equity over a specific period of time by paying higher rent. You can avoid buyer competition. Your rent will be more expensive. Even if your contract is set up so that part of your rent is going toward equity in the home every month, your rent prices will be higher because of that. You may have to pay for repairs and maintenance. Home values could go down. If you have a rent-to-own contract for a couple years, you have no way of knowing what the real estate market or local economy could do during that time.