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Rent-to-Own: How Does It Work and When

A popular alternative home purchase method is known as a rent-to-own agreement, also referred to as a lease or lease-to-own option. A buyer who goes into a contract like this agrees to pay the rent for a particular property within a preset duration, before deciding whether they want to purchase it on or prior to the expiration of the lease.

A rent-to-own agreement can be the best option for people who are interested in owning a home but have not been qualified for a mortgage, or those who are yet incapable of meeting the demands of being a homeowner. For instance, your credit score may be less than impressive to lenders, but the problems that led to that score are gone and you have been consistently improving your credit ever since. Perhaps your debt-to-income ratio is excessively high, but not by a lot, and your budget can accommodate extra payments and decreasing your debt substantially over the next few years.

You may have a well-paying job, or landed one with a much higher salary, but you haven’t had it long enough for a lender to you think you have a stable source of income. In the same manner, you might be successfully self-employed, but lenders are not that confident about your track record. Or you may have saved some money but it’s still enough to cover the typical down payment for a home, which is usually around 20% of the purchase price.

If any of the above is true to your situation, renting to own could be your best option. You can lock down a house you like for a period of time, and in the meantime increase your odds of getting a mortgage by improving your credit score, saving more money, and doing whatever else it takes to achieve your goal. And, in case the option money or percentage of the rent comes close to purchase price, you can start to build some equity at the same time.

A rent-to-own agreement works when potential buyers are absolutely sure about being able to buy the house upon the lease term’s expiration. If you honestly think there’s more than a 50% chance that you will move out and not proceed with the sale, think twice. It’s highly improbable for an owner or landlord to agree to a refund of the rent credit and the option fee to give you that flexibility of moving.

If you honestly believe there’s a chance for you not to get qualified for a mortgage or any other type of financing by the time the lease expires, you should continue renting with a typical lease, improving your credit, and saving money for a down payment. And when you’re fully prepared, you can pick any house on the market that aligns with your needs, aesthetics and budget.

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