Introduction to Rent to Own: A Comprehensive Guide for Home Buyers

Would you like to own a home without having to get a traditional mortgage immediately? Rent to Own (R2O) might be the perfect solution for you. This article covers everything you need to know about rent to own properties, from initiating the search process to negotiating the contract, and finally, obtaining a mortgage.

Part 1: Finding Homes

Searching Online Websites

There are numerous online platforms where you can find rent-to-own properties, such as HousingList and IRentToOwn. However, you may need to pay a subscription fee. These websites can still be valuable resources, especially if you are struggling to find suitable properties. Always check the monthly rent and conditions before subscribing.

Driving Around Your Neighborhood

Do not overlook the power of driving around your preferred neighborhood. Owner-sellers often advertise their homes as rent-to-own properties directly on yard signs. These signs will also display the monthly rent fee. This method can be a cost-effective way to find a home without paying a subscription fee.

Directly Speaking with Sellers

If you come across a perfect home, but the seller insists on a mortgage, you can always negotiate a lease-to-own agreement. Additionally, if the home has been on the market for a long time, it might be a sign that the seller is willing to consider a lease-to-own deal.

Working with a Real Estate Agent

An experienced real estate agent can provide access to exclusive rent-to-own listings and can introduce you to potential sellers who are considering this option. You can find agents by checking online listings or the phone book.

Part 2: Performing Due Diligence

Understanding the Seller's Motivation

It is crucial to understand the seller’s reasons for selling the property. If the seller is in financial distress, they may default on loans or declare bankruptcy, potentially leading to the loss of your home. Ask why they are selling the property.

Credit and Financial Checks

Conduct a credit check on the seller to identify any delinquent accounts or a substantial debt load, which can indicate financial instability. Ensure you know the seller's income to conduct an accurate check. You can obtain a credit report from major bureaus like Experian, Equifax, or TransUnion.

Property Records Check

Visit your local tax assessor to review the property tax records. Confirm that the seller owns the property and there are no outstanding tax claims. Scammers often list non-owned properties on the market to make a quick buck.

Watch Out for Scams

Rent to own sales are relatively uncommon and are largely unregulated, making them an attractive area for scams. Look out for rent rates that are too low, sellers who do not care about your credit history, confusing or unclear lease contracts, and unreasonable application fees.

Home Appraisal and Inspection

Have the property appraised to confirm its value. A home inspection is essential to identify any major or minor problems. For a standard 1000 sq ft home, expect to pay around $500 for an appraisal. Common home inspection expenses can range from $300 to $600, but they can save you thousands of dollars if they identify issues.

Title Report

Obtain a title report from a title insurance company to confirm ownership and check for any liens. Obtain a rough estimate of $100 for this search.

Review Your Credit with a Mortgage Broker

Consult a mortgage broker to assess your current credit status. Identify any factors that may prevent you from qualifying for a mortgage in the future. Plan now to improve your credit score.

Part 3: Negotiating Your Contract

Setting the Purchase Price

The purchase price can be agreed upon in the lease agreement or set at the end of the lease term. The price is typically slightly higher than the current market value to account for potential appreciation.

Negotiating the Option to Buy

You must pay for the right to buy the home at the end of the lease agreement. This option consideration is non-refundable if you decide not to proceed with the purchase. However, if you do, you can be credited 100% of the option consideration towards the purchase price.

Lease-Option vs. Lease-Purchase

A lease-Option contract provides more flexibility as you do not have to buy the home at the end of the lease. Make sure to seek this type of contract to protect yourself from becoming locked in.

Setting the Lease Term

The lease term typically ranges from two to five years. Plan your financial strategy to improve your credit score and ensure you have enough time to qualify for a mortgage.

Determining the Rent Premium

Your monthly rent will have a rent premium that accumulates as you rent. This accumulated amount can be used as a rent credit towards the purchase price when you decide to buy the property.

Assigning Maintenance Responsibilities

Clearly define who is responsible for routine maintenance, major repairs, homeowners association fees, property taxes, and insurance within the contract to avoid any disputes.

Legal Review of the Contract

Before signing, have a lawyer review the agreement, especially if the seller drafts the contract. Contact your local or state bar association for a referral to a real estate attorney and schedule a consultation.

Part 4: Obtaining a Mortgage

Improving Your Credit Score

To qualify for a mortgage, you need a minimum credit score of 640 for a conventional mortgage. Use websites like Credit Karma or Experian to get your credit score. Consider credit counseling to improve your score and manage debts effectively.

Paying Down Debts

Focusing on paying off credit card debt will improve your credit score quickly. Create a budget and stick to it. Credit counseling services can help lower interest rates and remove fees.

Removing Inaccurate Information

Review your credit report for any inaccuracies. Dispute any reported errors or unauthorized accounts with the relevant credit bureaus.

Exercising Your Option

Inform the seller before the deadline that you intend to purchase the house. The contract should specify the process for exercising your option.

Getting Pre-approval for a Mortgage

During the preapproval process, the lender will review your income, assets, and monthly debt obligations. Apply for pre-approval within 60-90 days before the closing to ensure the approval remains valid.

Final Closing Procedures

Before closing, the lender will perform due diligence, such as an appraisal and inspection. You will review the terms of the mortgage and any disclosures from the seller. Aim to close within 45 days of exercising your option.