When someone decides to purchase a home, one of the first things they must comb through is their credit report and credit score. If their credit is less than stellar, and they cannot qualify for a conventional home mortgage, renting-to-own or a lease with the option to purchase sounds like a great way to begin their home buying process. There are positives and negatives to this type of transaction; let this guide help make whether the decision is worth it. 

 

  • Rent-to-own agreements can also be called lease-to-own, lease-with-option-to-purchase, or simply a lease option. Lease-purchase agreements require the tenant to buy the property, and this can cause major financial issues if the tenant cannot follow through on the purchase, no matter the reason.  
     

  • Decide on a final purchase price at the end of the option period, or agree upon an appraisal contingency. Depending on the fluctuation of the housing market, however, this could benefit the buyer if market value goes down, but could benefit the seller if values increase.  
     

  • It may be a good idea to have a home inspection performed before getting into this situation. In the case that the inspection raises concerns, repair costs can be worked out between the tenant and the owner. 
     

  • A portion of the above-market rent will go towards the purchase of the house, most commonly in the form of a down payment.   
     

  • Some tenants agree to pay HOA fees (if applicable), property taxes, insurance and take care of the cost of necessary repairs. 
     

  • In most situations, the tenant can purchase the property at any time during the option period, but once that time is up, the option expires and the owner can sell the property to someone else. 

  • One very important thing to remember is that there is still a lease involved. If you fall behind on the payments, the landlord can have you evicted. Besides eviction, the option fee and extra rent paid will be lost. 
     

  • Sometimes a seller offers to finance the purchase altogether, and that situation will require a completely different set of agreements. Again, owner-financed sale contracts should be handled with a real estate attorney. 

 

While it may be a relief for someone who cannot get financing for a traditional home loan, a lease-with-option agreement is not something to enter into lightly. If you feel you will not be able to purchase the home at the end of the option, go into a standard lease agreement, and put away as much money as you possibly can towards a traditional down payment while working on improving your credit score. 

 

Courtesy of Chester County PA Realtor Scott Darling.  

 

Photo credit: IndyStar