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How a Rent-to-Own Works

By Mary Lamphere

For many aspiring home owners, rent-to-own is the best option to get into a home and start saving towards a down payment while also being provided adequate time to improve their credit rating and secure financing. Also known as a lease purchase or lease option, rent-to-own properties are generally a safe option for potential homeowners who are not quite ready to buy financially but plan on having their finances in order within the next two to three years. Buyers should know that, although rent-to-own is generally safe, there are some potential dangers to be on the lookout for.

Rent-to-own contracts work in various ways depending on the agreement made between the homeowner and the home purchaser. Typically, the homeowner or seller will already have the details of the contract set forth before the potential purchaser moves in but in some cases, the decision to offer a lease-purchase option comes after a tenant has already been living at a property for a period of time and the homeowner decides he or she want to sell. Regardless of how the decision to offer a home for sale via a rent-to-own contract, both buyer and seller must be in agreement to the terms set forth in the contract.

Application Process

Some rent-to-own properties will have an application process similar to a typically rental application. The seller may want to check credit rating, financial background and other verifiable information before making a decision to allow a tenant to move into the home with the option to purchase. This is the seller's way of making sure that the tenant will potentially be able to secure financing in the coming years and that he or she will be likely to follow through with the terms of the contract.

Down Payment

One major benefit to a rent-to-own property is that the tenant is not required to have a substantial down payment upon moving into the home. In some cases, the seller may require a larger down payment than would be expected when simply renting the property but typically, the seller will allow the tenant to move in with a down payment similar in size to that of what would be expected in a rental property. The difference here is that the buyer will be required to continue to pay additional money with the rent or on a set schedule towards the total down payment for purchase of the property. Many sellers will allow the tenant to pay an additional $300 or more on the rent which is applied towards the total down payment of the home.

Financing

Once the tenant has lived in the home for a period of usually two to three years and has performed due diligence to improve his or her credit rating and financial stability they will be required to secure financing through a lender. Some rent-to-own options provide a longer term than just three years while others may require that the buyer have his or her own financing within twelve months or less. These terms are all set forth in the contract that was originally agreed upon between buyer and seller.

Dangers

Unfortunately there are some dangers to rent-to-own properties. Many are already run down and require substantial upkeep or repairs which could become costly for the tenant. Most contracts will stipulate that the tenant is required to take on repair costs if renting to own which eliminates responsibility from the seller. Furthermore, if the buyer is unable to secure adequate financing within the time specified in the contract, the seller will have the right to forfeit the sale and is under no obligation to return the funds that were provided for down payment over the duration of the rental time. These dangers should be considered before moving into a rent-to-own property.

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