Housing demands increase as cities continue to grow. This can make purchasing a home more and more unaffordable for many Americans. Buying a home in many cities requires homebuyers to have substantial savings in addition to a sizable yearly income. Furthermore, when a buyer purchases a home, they will need to borrow money from a lender such as a bank or a credit union. This is because it is incredibly costly to purchase a home and most buyers will require help financing their purchase. In order to secure a loan, homebuyers will need to have a relatively high credit score.
Fortunately, future home buyers have an opportunity for homeownership that is available if they cannot currently afford the purchase of the home. Rent-to-own is a great option for these types of home buyers. By choosing to rent-to-own, homebuyers can save up money and boost their credit scores as they prepare to buy the home in the future. This option allows homebuyers to choose a house that they want to eventually purchase, and begin by renting it. By doing so, they can ensure that the house is available when they are finally able to afford the purchase of the home.
Rent-to-Own: How does it work?
Instead of applying for a home loan to finance the purchase or paying with case, homebuyers can choose to become tenants in a rent-to-own agreement. In a rent-to-own agreement, tenants will be able to move into the home that they will potentially purchase in the future. Rent-to-own agreements allow homebuyers to move in to the home before they can fully afford the purchase. These rent-to-own contracts can vary depending on the seller, but certain factors are established such as the amount of time on the contract and the portion of rent payments that will contribute towards the purchase of the home.
Learn About Negotiating a Purchase Price
The biggest benefits of initiating a rent-to-own agreement is the fact that a homebuyer can begin to rent a home that they cannot currently purchase, but eventually plan to. As such, one of the most important factors to agree upon is the purchase price of the home. While negotiating a rent-to-own agreement, the contract can state whether the buyer has the option or the obligation to purchase the home at the end of the rental period. Agreeing upon as many terms as possible ahead of time can help prevent any disagreements after the rental period has concluded. One of the most important terms to agree upon is the final purchase price, and this can be the most difficult to determine.
When the buyer and seller are determining the purchase price of a home for a rent-to-own agreement, they will have two primary options to choose from. First, the negotiating parties can decide not to set a purchase price on the home while the rent-to-own agreement is active. Instead, they will opt to decide on the purchase price after the rental period has passed. This option can cause the purchase price to vary drastically depending on the price today and the price at the end of the rental period. Typically, this method will benefit the seller, especially if the home prices in the local area are predicted to increase over the next few years. This is because the buyer will have to negotiate the purchase price based on the condition of the housing market once the rental period has concluded.
The other option available for tenants in a rent-to-own agreement is to determine the home’s purchase price at the start of the rental period. In order to compensate for the changes in the housing market over time, the negotiating parties will typically finalize the agreement on a price that is notably higher than the current market value of the house. Buyers can benefit from this type of agreement because it helps them secure a home at a lower cost in case there is a significant surge in the price of houses on the market by the end of the rental period. However, deciding on the purchase price of a home at the beginning of a rental period can also have drawbacks. For example, if the home’s value decreases or does not increase significantly over the rental period, than they may end up paying more for the house than if they waited to negotiate after the rental period.
Learn About the Pros and Cons of Rent-to-Own Agreements
When deciding whether or not to choose a rent-to-own agreement, it is important to know that the option comes with various advantages and disadvantages. This means that the option may be a good solution for some homebuyers, while being a poor choice for others. Buyers lacking funds who are looking to purchase a home that they are sure they will be able to afford in the future may find that rent-to-own agreements are a good option. By establishing a rent-to-own agreement, homebuyers will be able to start building their equity on the property that they will eventually purchase. During this time, the homebuyer can also build their credit and save money so they are prepared for the down payment for their home after the rental period.
The lack of flexible options is one of the largest drawbacks of rent-to-own agreements. As such, rent-to-own agreements will naturally be better for homebuyers who are looking to purchase a home and are okay with contracts that are less flexible that traditional leasing agreements. Another disadvantage is that rent-to-own contracts will have to pay an option fee to set up the agreement. An option fee is a non-refundable charge that will guarantee that the home will be available to the tenant for purchase after the rental period ends. The option fee also gives these tenants the choice to back out of a rent-to-own agreement at the end of rental period if they do not want to purchase the home. At the end of a rental period, this option fee is sometimes used to pay for some of the down payment. However, if they back out will lose the fee they paid.
Note: If there is no option in the rent-to-own agreement, homebuyers may be obligated to make the purchase at the end of a rental period.
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