Rent-to-own homes are not as common as simple home purchases, but they can help ease the transition from renting to owning. Most home loan terms for standard mortgages require you to have a sufficient credit score, down payment, and income.
With rent-to-own homes, however, you can start paying for your new home while building your credit, saving money, and establishing a solid work history. By the time the rental term is over, you may be in a better position to get approved for a home loan.
There are two types of rent-to-own home agreements:
- Lease-option contract – At the end of the rental term, you can choose to purchase the home
- Lease-purchase contract – At the end of the rental term, you are obligated to purchase the home
You can apply for low-interest government loans when it is time to purchase a rent-to-own home. When and how the seller determines the purchase price is an important factor.
If the seller sets the price at the beginning of the agreement, the following situations could happen:
- The market could improve over the course of the lease, and they may end up selling for less than the market value.
- The market could worsen over the course of the lease, and the buyer could pay more than the appraised value of the home. A purchase price higher than the home’s value could make it difficult for the borrower to obtain a loan.
Similarly, if the seller sets the price at the end of the agreement, the following situations could happen:
- The market could improve during the rental term, resulting in a higher purchase price.
- The market could worsen during the rental term, resulting in a lower purchase price.
With rent-to-own homes, the seller usually sets the purchase price slightly higher than the current market value. This is meant to account for an upswing in the housing market.
There may be other costs associated with these types of homes. For example, most contracts have a nonrefundable upfront fee between 1 and 5% of the purchase price.
Some contracts put a portion of your monthly rent toward the purchase price. This pays just the principal, not interest charges.
For example, let’s say your three-year rent-to-own agreement puts $300 of your $1,200 rent toward the purchase price. During this time, you would pay $10,800 toward the principal.
In addition, rent-to-own homes give you time to make yourself a more desirable candidate to mortgage lenders. You can increase your credit score, pay down your debts, and increase your income.
However, there may be a few downsides to choosing rent-to-own homes, including the following:
- Higher monthly rent – Since part of the rental payment goes toward the purchase price, the rental rate is often higher than normal. It is important to make sure the higher monthly obligation doesn’t make covering basic living costs impossible.
- You could lose money – If you choose not to purchase the home, you forfeit any money you paid toward the sale. You could also lose money if you cannot secure financing, which is why setting the price at the end of a term in an upward trend can be risky for buyers.
You can get a low-interest home repair loan if you already own a home but need cash for renovations. Government home repair loans take many forms, and your income or age influences your ability to get approved. Continue reading to learn how you could get money to repair, renovate, or build your home.