Rent 2 Own

How to Buy a House Rent to Own

f you’re ready to buy the home of your dreams, but your credit or savings isn’t quite ready yet, a Rent 2 Own approach may help you move in tomorrow. Rent 2 Owns, in which you lease (rent) a property and have the option to buy the property during or at the end of the lease term, can allow you to control the home that you want. A lease option may also be helpful if you need some time to improve your credit before getting a mortgage.

Steps

  1. Determine if a “Rent 2 Own” is a good option for you. A Rent 2 Own can be a useful home buying tool, but they’re not for everybody. Ask yourself a few questions before you decide to pursue a Rent 2 Own:
    • Can you afford the option fee? The option money or option fee is required for a Rent 2 Own contract to be valid. This upfront option fee is generally 3-5% of the purchase price. All of this money should go toward the purchase price or down payment on the home when you decide to buy the home during, or at the end of the lease term. But unlike a security deposit, you don’t get the option money back at the end of the lease if you can’t purchase the house, or decide not to.
    • Do you plan on staying in the area? Since a lease option typically costs slightly more than simply renting, you should be reasonably certain that you want to buy the house at the end of the term.
    • Will you be able to secure financing at the end of the lease term?
    • In some cases, the Seller will finance the purchase of the home at the end of the rental period. Most of the time, however, the buyer will need to find his or her own financing by applying for a loan. A Rent 2 Own can help you get a more favorable loan then you otherwise would be able to, but it’s no guarantee, so you’ll want to be reasonably sure that you’ll be able to qualify for a loan at the end of the term. We will have you meet with a local mortgage broker/loan officer to examine your current situation and determine if you should be able to qualify for a mortgage before the end of your option period.
    • Can you afford the monthly payments on the lease?Typically (but not always) the monthly payments on a Rent 2 Own property will include the fair rental value plus “rent credit”, which is money that will go toward the purchase of the home. Thus, the monthly payments under a Rent 2 Own will usually be slightly higher than you would pay if you were simply renting the same house.
    • Will you be able to make the monthly payments on the home and meet other expenses of ownership? Even if you’re able to get the loan, it won’t do you any good if you can’t afford to keep up with the expenses of owning the home. We want you to be sure to factor in not only the mortgage payments, but also property taxes, insurance, and maintenance costs, all of which renters usually don’t have to pay.
  2. When we find you a home that you want to buy. Keeping the above considerations in mind, we will help you look for a home that you like and that you can afford.
  3. Get a home inspection. Once we’ve found you a suitable home with an agreeable Seller, it’s time to get the home inspected. Get an independent professional home inspector to do a full inspection so you can become aware of any problems the house may have. In Minnesota, the Seller is also required to give you a Seller’s property disclosure attesting to the condition of the home, but an independent inspection is still important. If there are problems, make sure they’re not issues that will prevent you from getting a loan, and make sure the contract specifies who is responsible for making any repairs resulting from problems discovered during your inspection. The Seller may also offer an allowance off the purchase price to enable the Rent 2 Own Buyer to make the repairs when the option to purchase is exercised.
  4. Negotiate the terms of the lease option. The purchase price, term of the lease (usually anywhere from 12-36 months), the amount of initial option fee, and the amount of the monthly payments that will go toward the purchase price will all be negotiable.
  5. Pay an option fee and sign the contract. The option fee is the upfront “consideration” that is necessary to make the contract binding. Pay this and sign the contract only once you are sure you understand all the terms of the agreement and you agree with them.
  6. Check on your insurance needs. Since you now have an interest in the home, you may require additional insurance to protect the home. Check with your insurance agent to find out what coverage you need.
  7. Make monthly payments. You will make monthly payments just as you would make rent payments. In many cases, however, a portion of the monthly payment will be designated as “rent credit”. This money will go toward the purchase of the home when you close on the purchase. It is likely to be a small percentage of the monthly payment ranging up to 20% at the very high end. Again, however, the “rent credit” will generally be over and above the fair rental value, so the monthly payments will be more than they would be to rent the same home.
  8. Make improvements on the home. If the home inspection turns up minor problems, or if the home needs a little remodeling or cosmetic care, it is probably in your best interest to try to take care of these things. By increasing the value of the home with improvements during the lease term, you earn equity (so-called “sweat equity”) in the home because the agreed-upon purchase price stays the same. This increased equity may help you get a more favorable loan when you purchase. In essence, by increasing the value of the home you are increasing your down payment.
  9. Apply for a loan. Our process has you in front of a local mortgage professional before you sign any agreements. The mortgage professional will pull your credit (don’t worry, we will help you repair your credit if needed), verify your employment, income, and debt to income ratios. All this will make sure that you are not getting in to a contract to purchase a home that you could not possibly qualify for. You should begin your application process immediately, even though you will not be purchasing your home for a number of months. To be safe you should probably work to be fully qualified for your mortgage a full two months or more before you need to buy your home. In any case, it’s essential to have a mortgage ready to close on the home by the date specified in the Rent 2 Own contract.
  10. Close on the Purchase Of Your Rent 2 Own home. Now that you’ve lined up your financing and closed on your Rent 2 Own home, congratulations. You are now a PROUD homeowner.

Tips

  • It’s a good idea to try to get pre-qualified for a mortgage, particularly if it’s only the lack of a down payment that’s keeping you from getting a loan. While our Rent 2 Own pre-qualification process can give you an idea of what you should expect when you seek a loan, it’s no guarantee that you’ll be approved for the same terms later. In addition, if you’re hoping to improve your credit profile during the rental period, you may be able to get a far better rate at the end of the lease term than you would have been able to get at the beginning.
  • The Rent 2 Own Buyer doesn’t have to buy the property under a Rent 2 Own, but the Seller does have to sell (at the agreed-upon price in the contract) if the Rent 2 Own Buyer fulfills the contract and exercises the option to buy. If the Rent 2 Own Buyer decides not to buy the home, he or she simply walks away.
  • Keep good records of your payments and expenditures. You will need a record of your payments to help you qualify for a loan. Additionally, good record keeping will defend you against unscrupulous Sellers who could try to take advantage of you by claiming, for instance, that you fell behind on your payments or missed payments.
  • Many Real Estate agents are hesitant to deal with Rent 2 Own and may discourage you from exploring this option either because they are unfamiliar with how they work, or they fear their commission will be reduced or possibly negated if the Rent 2 Own Buyer decides not to buy the property. TwinCitiesRent2Own was formed to assist qualified Buyers and match them with Homeowners willing to sell with a Rent 2 Own transaction.
  • How long should your lease be? It depends. If you want to improve your credit profile, a longer term is usually best. Lenders especially like to see stability over two years, so if you’ve been living in the same house, making all payments, and working for the same company, you will likely qualify for a better loan. A longer lease can also help you build equity in the home. We generally recommend a 12-24 month term, but a longer term can be negotiated if needed.
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