There is More Than One Way to Buy A Home
One of the age old questions has been should I rent or should I buy my home. There is another option that has become more popular over the past year with the slow housing market, rent to own homes. While this seems to be an answer, it actually isn't because a person who takes advantage of this option has decided to buy a home. But it does change the age old question bit: rent to own or buy outright?
Make Sure the Terms are Clear and the Rates are Fair
Part of the difficulty in deciding whether or not to take the rent to own homes option is that the process can be very different from one person to another. It all comes down to how the purchase contract or option to purchase is written between the current owner and the prospective renter/owner. A typical contract is for 1 to 3 years and it sets aside a portion of the monthly rent for a down payment. This future down payment is called a rent premium and most contracts contain a clause that if the renter doesn't buy the house at the end of the contract, this money goes to the seller. Many contracts also call for a small fee for the privilege of having the rent to own option.
This fee, called the option fee, is typically an upfront amount but the contract can be written so that it is paid in small amounts every month. There is also usually a clause that gives the seller the option fee if they renter doesn't buy but allows the option fee to become part of the down payment if they do buy. A typically contract also includes the agreed upon selling price, even though the sale isn't going to finalize for another 1 to 3 years. This is a contracted price; no matter what is happening with the housing market with the contract term is over. The other money in the contract is the amount that goes to the seller for rent each month. This money doesn't go to the down payment, it is money paid for renting the house. It looks like the seller gets all of the benefits in this type of arrangement but that isn't necessarily true.
What Are the Benefits to Renting Housing?
The rent to own homes option does offer some benefits to the renter. First it allows someone who can't borrow money because of their credit score to get into a contract for their own home. Second it allows someone who doesn't have enough savings for a down payment to build up that money while living in their soon-to-be home. Third this is often the best answer for people who feel that they are just throwing away money on a rental but still are not ready to be actual home owners. Part of the money that gets paid every month for rent does actually go to the seller but part of it also goes towards the down payment so it is not all being 'wasted'.
The other benefits of taking the rent to buy home option depend on the contract. If the contract is written so that the owner is still responsible for the big cost items that need to be replaced, then it benefits the renter. On the other hand if the contract makes the renter responsible for all repairs then it benefits the seller. If the contract allows the renter to make changes to the home then it could benefit the renter. For example, the renter could upgrade the kitchen and then the house would be worth more at the end of the contract.
The bank always looks at how much the house it worth when determining a loan approval so if the house is worth more than the loan, this is a benefit to the buyer. This type of contract also allows the renter to feel as if they own the house because they can treat it like they own it.
Many people prefer the idea of owning instead of renting; in fact it is considered part of the American dream to own your home. The reality is that not everyone can own their home and this is usually due to credit scores or lack of down payment. These people can now take advantage of the rent to buy homes option and start living their dream.
