Is Rent to Own a Good Idea For You?
June 8, 2016 by Natalie Heller |
Since January 2014, mortgage underwriters have been placing stricter rules into effect for home loans. Nowadays, for someone to qualify for a mortgage, they usually must have lower than a 43 percent debt-to-income ratio. Accordingly, alternative types of home buying, such as rent to own and installment loans, are becoming more popular.
Rent to own agreements tend to vary between geographical locations and on a case-by-case basis. Typically, rent to own involves a tenant leasing a home for a few years with the option of buying it. In a lease-purchase contract, the tenant is obligated to purchase the home. In a lease-option contract, the tenant is not required to purchase the home. The defining characteristic of rent to own is rent premiums. Rent premiums are an extra amount the tenant pays per month to build equity in the home.
What Could Go Right With Rent to Own?
There are several attributes of rent to own that appeal to prospective home buyers. Rent to own is a good alternative for buyers who want to purchase in a certain area, but don’t qualify. The buyer rents the home for a few years and buys it in the future. For many people, a few years is plenty of time to improve their credit and save for a down payment.
Landlords use their time and money wisely by leasing their home. Rather than waiting around for a piece of property to be sold, they can make some extra money by renting it in the meantime. This is useful, especially when the housing market is slow. For homeowners who are still being impacted from the 2008 recession, renting to own could be a great way to continue investing in the property.
From the tenant’s perspective in a rent to own agreement, the leasing period could be a great time to improve his or her credit score. A landlord can report a tenant’s timely payments to the credit bureau. After a few years have passed, the tenant will likely have built good credit. Additionally, the tenant can familiarize themselves with the neighborhood before purchasing.
What Can Go Wrong With Rent to Own?
On the other hand, some rent to own agreements can have major pitfalls. The rent to own business has a reputation for luring unsuspecting homebuyers into fraud or a scam. Read more about rent to own scams here. Moreover, buyers who rent to own could get ripped off if the purchase price they initially agreed on turns out to be more than the market value when they eventually buy the home.
Rent to own can also get tricky when it comes to home title issues. In some states, previous rent to own tenants can cause legal problems with the title, if they’re still interested in purchasing. In this case, the landlord would have to complete a Quiet Title action to disassociate the tenant from the property. In addition, a rent to own contract may become void if the tenant discovers that the landlord is in the process of foreclosing the home. It’s a wise idea for you to undergo a title search and background history to ensure the landlord is credible.
Is Rent to Own A Good Idea?
Ask an experienced lawyer to review your rent to own contract before you signing. Rent to own can have many benefits, but only if you know what exactly you’re getting into. Check out 6 Key Rent to Own Contract FAQs to guide you as you work to finalize your contract.
You should also contact an experienced mortgage lender before you begin the process of reviewing the contract. He or she will be able to tell you if renting to own will be a realistic option for you down the road. You probably shouldn’t rent to own if you have doubts about being able to qualify for a mortgage in a few years. It is hard for an overwhelming amount of people to qualify for a loan, given current credit conditions. However, there are still other choices available if you decide that rent to own isn’t a good option for you. To learn about these other choices, view the Alternative Options section of our rent to own guide.