The traditional mortgage process is designed for people with good credit and money to put down on a purchase price. If bad credit is getting in your way of becoming a homeowner, a rent-to-own property may be right for you. Understanding the process and how rent-to-own financing works will help you to make the right decision for your situation.
Leasing the Property
The first step of moving into a rent-to-own home is to work out a lease with the property owner. Most rent-to-own financing contracts give you at least one year and up to three years for the lease period. During your lease, you will have time to improve your credit score by paying your rent and utilities on time, reducing your debt and correcting credit report errors; this could help you obtain the financing to purchase the home at the end of your lease.
Most rent-to-own housing arrangements require that you put down some option money. This is a non-refundable deposit that gives you the option to buy the home at the end of your lease—it is similar to a security deposit or escrow account. Some contracts may refund the option money to you, especially if the owner changes his or her mind about selling the home at the end of the lease.
Fixed Closing Cost
When you secure a lease, the amount that you would pay to own the home does not change at the end of the leasing term. This means you get a great deal, especially if the real estate market is going up in your area. Rent-to-own financing will help you to build a considerable amount of equity in the house.
Each month, a portion of the rent payment goes toward the purchase price of the home. For people who would not be able to save up for a 20-percent down payment, a bad-credit home with rent-to-own financing could make the purchase price more affordable.
Familiarity with the Home
In the traditional home buying process, you don’t get to live on the premises before you purchase; with rent-to-own homes, you live there for the duration of the lease. This allows you to become familiar with the house and the surrounding community. So, if it turns out you don’t like the property or area, you can move at the end of the lease with no further obligation.
Potential to Lose Money
Although there are many positives related to the rent-to-own home-buying process, there is a chance you could lose your investment. If you are unable to secure the financing needed in order to purchase a home, you will lose the rent credit that you put into it. To help prevent this from happening, be prepared to actively work on improving your credit score throughout your rent-to-own leasing term.