Wednesday, November 19, 2014

Rent-to-Own: How Does it Work?

Buying property entails a mortgage (not to mention qualifying for that mortgage, to start with), and a downpayment, paid in full, on the home. But one alternative to purchasing your home initially comes without either of the two.

In a rent-to-own setup, the buyer – in this case, a renter or tenant – is given the option to buy the property for lease. This arrangement allows for the buyer to live in – to “test drive,” so the speak – the property in question. It should also allow for time for the buyer to build his credit score during the term of the lease.

Typically at two to five years, the term of the lease refers to the time period during which the buyer can rent the property. The monthly rent, in this case, functions as a payment scheme. Inclusive of an “option fee,” the rent is typically higher than the market rate in a standard lease agreement. Collectively, this “option fee” eventually becomes the principal payment or the downpayment on the property should the renter purchase the property after the duration of the lease.

Once the term of the lease expires, the renter may opt to buy or walk away from the property. Should the renter decide to purchase, he or she could then approach the bank for a mortgage to finance the remaining balance on the property. Should the renter forego the purchase, no refunds of any portion of the rent will be made.

A rent-to-own setup offers a number of pros and cons to the seller and to the buyer. To date, it stands a popular alternative in purchasing a home, especially for individuals who have yet to build a credit score that can qualify for a mortgage right off the bat.


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