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Rent to own- How does it work?

Typically perspective tenants can have a portion of their monthly rent payment go towards a down payment for the home they are currently renting and plan on buying.  Rent to own options are good for those that are looking to stay in the home they are currently renting. It is also an option if you have less than good credit and need to be able to build your credit through renting.

When you rent to own the tenant signs an agreement with the owner of the home that will allow for the home to be leased with the option to buy the home later some owners prefer two to three year options. The monthly rental payment also includes the additional payment for the down payment of the home. Some owners may require a larger security deposit and be willing to add that to the down payment but that does depend on the rental agreement.

The rental agreement will state how long the rental lease is for, the amount of rent that is towards the down payment and the amount of the security deposit that is toward the down payment. The lease agreement should also state the home purchase price. That said before your lease ends it would be beneficial to get preapproved with a mortgage before the lease is up to ensure that you can afford the home. If for some reason you cannot get preapproved then the lease terms may be null and void.

For my house we (owner and I) came up with a rental agreement of a $1500 security deposit, rental payments of $1000 a month with $300 per month going towards the down payment, the lease length of three years and the purchase price of $150,000. This meant that at the time the lease was up there was 12,300 for down payment over the three years, which allowed for a 12 percent down payment of the purchase price.

If you are only using a 3.5 percent option then looking into a FHA loan may be a good option for you but I was able to get a conventional loan with my 12 percent down. That said having the preapproval from the mortgage company provided insurance to what all of the options that the perspective owner may have.

If for some reason you are not able to be preapproved and are unable to afford this home you can ask the owner if you could continue to rent the home without the rent to own option or to continue but modify the rent to own lease that you currently have with them. Anytime the rent to own lease is modified it is advised that you have an attorney look over the lease to clarify both parties responsibilities.

A major benefit to using a rent to own option is that all of your housing plans are in place. Meaning you do not have to move unless you want to but renting to own does limit your options on that so be cautious when fully deciding whether to just rent or rent to own. Another benefit is that renting to own allows you to build your credit and repair your credit. Credit scores and reports are a big factor when trying to get a mortgage and the rate that you will get as well as the amount you will qualify for so it is better to have your credit monitored and repaired before the lease is up.

Another good credit booster is asking your landlord/ home owner to report your rental payments to the major credit agencies. This along with making your payments on time can boost your credit score as well and does look good on a credit report.

All in all depending on your situation rent to own may be a good fit for you if you really enjoy the house you plan on renting and do not wish to move. If you need to build credit to buy a home later on and are comfortable with the rental agreement and payments.