Advantages And Disadvantages Of Rent-to-Own.
If getting a loan seems to be a nightmare for you, then a rent-to-own might be the choice for you. Rent-to-own contracts enable you to get into the home of your dreams without making initial commitments. Based on your financial situation, it can make a lot of sense to you if you aren’t financially ready to buy a home.
In a rent-to-own agreement, you get the opportunity to stay in the home and then decide whether you want to buy it or not. This way, you can knock down some potential obstacles on your way to achieving the American Dream of homeownership. Once you understand the entire concept, you can later decide whether it is right for you or not.
What Is Rent-to-Own?
A rent-to-own contract allows you to rent a house that you wish to buy for a specific amount of time. You have the time to decide until the agreement expires. A standard rental agreement is prepared wherein it mentions that the tenant has an option to buy the property at a later date. Based on the contract, a portion of the monthly rent is put towards the eventual purchase price, which helps you save on the go while you are building the home equity.
Rent-to-own contracts are for those people who want to become homeowners someday but are not ready to take the plunge yet. If you need time to improve your credit score or secure the down payment, this type of arrangement can give you some relaxation while you arrange for your finances.
Real estate agent San Antonio has created this guide to help you understand the concept a little better, along with its advantages and disadvantages.
Rent-to-own contracts fall under two categories
Lease purchase – In a lease purchase, you are legally obliged to purchase the home at the end of our lease agreement. If you plan on abandoning the deal because of financial issues or any other reason, you will be facing strict legal actions.
Lease option –This is a bit lenient. In a lease option, you have the liberty to walk away after the lease ends and you change your mind. There will be no legal obligations.
Rent-to-own contracts don’t always make financial sense. It is, however an affordable option because of the price-to-rent ratio. Start by taking the median home price in your area. Divide that by the annual rental costs. If the total comes below 15, rent continuation will be more expensive than buying.
Working with a San Antonio realtor will help in making the process easier.
Advantages of Rent-to-own
Equity Building
Rent-to-own contracts help you in building your equity if the contract allows you to direct a portion of your monthly paid rent towards the purchase price. Over time, it adds up to become a sizable down payment that you may have otherwise struggled to collect. However, every agreement is different. That is why; you must always read it well before signing. Do your research well on the important things to keep in mind before you invest.
Avoids short term credit issues
If you are dealing with short-term credit issues, then this type of contract is ideal for you. If you have a less than perfect credit score, you may not qualify for getting a mortgage. Rent-to-own contracts will be helpful in that case if you are a potential home buyer. Another advantage is that you may be able to lock your purchase price if the contract will allow it. Knowing this beforehand can help you save a larger amount of down payment in the interim.
You will not have to deal with the hassle of moving
Because you are already living in the same house, you will not have to deal with the hassle of moving or moving costs once the lease expires. You can save thousands of dollars because you will not have to bear the costs of movers and packers, new furniture, etc. And, if you feel you do not like the home, you can always back out, as long as the contract allows you to do so.
Disadvantages of Rent-to-own
Nonrefundable upfront fees
This is one of the downsides of rent-to-own. Upfront fees are generally applied to your down payment when you decide to buy the home. Every contract is different, but a 1% purchase price is the standard option fee.
Higher rent
Another disadvantage of rent-to-own is the higher rent. If a part of your monthly rent is applied to your down payment, your rent will be higher than the market rate. At least 10 to 15% higher. Your contract will also mention that you are responsible for the property maintenance when on rent. If your roof starts leaking or your AC stops working, then it will be a costly deal.
No mortgage guarantee
Even if you rent-to-own, there is still no guarantee that you will qualify for a mortgage at the end of your lease agreement. However, people who strategically use their rental period to save and strengthen their credit history will be in a better position to qualify for the mortgage. It is an important thing to keep in mind that if the owner default on the mortgage and the house is foreclosed before you buy it, you could be asked to leave.
Lease Purchase
If you sign a lease agreement that obligates you to buy the property at the end of the lease period, there is no turning back. If you aren’t able to afford the property and you have signed the lease-purchase, you will be landing in a serious legal or financial problem. Therefore, before signing, make sure to consult your San Antonio Realtor and then go ahead.
The Bottom Line
Rent-to-own is a unique financing tool that can make it easier for you to become a homeowner from a renter. But, before going ahead, it is better to consider its pros and cons and then make any decisions.
That being said, rent-to-own gives the homebuyers enough time to save up for a solid down payment and improve their credit score. Also, you must work with a top real estate agent in San Antonio and get complete assistance in making your process smoother.
