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Most homebuyers need a mortgage to finance the purchase of a new home. There is a set of qualifications like a good credit score and down payment. If a buyer is not qualified, the traditional home buying process may not be an option.

But there is an alternative, a rent-to-own agreement. So, how does rent to own process works? Is it a great option? Read on to understand this agreement better. 

What is a rent-to-own agreement?

In a rent-to-own agreement, you will be able to buy a rent-to-own home. In this contract, you, the buyer, agree to rent the house for a specific period, with an option to purchase the property before the lease expires. 

The period usually ranges from several months to several years, depending on the agreed contract. The rent that tenants pay every month is income to the seller. A portion of it goes toward the down payment to eventually buy the property. For many, this type of agreement may sound like an excellent option, but is it really?

Rent-to-own homes have two different types of agreement: 

  1. Lease option agreement - in this agreement, you have the option to buy the home after the agreed time period.
  2. Lease purchase agreement - in this agreement, you are legally obligated to purchase the house. 

Read also: Is a Historic Home the Right Investment for You? 

The steps involved in the rent-to-own process

Rent-to-own processes vary depending on the contract agreed by the buyer and seller. But most transactions involve the following components. 

  • Purchase price - The rent-to-own agreement states when and how the purchase price is decided. It could be based on either the property's predicted value or current value. In most situations, the sale price of the house is locked once the seller and buyer sign the agreement. In other cases, the purchase price will only be decided once the lease expires. 
  • Option fee - As stated in the contract, the renter will pay a set amount to the seller.  If the renter buys the property at the end of the lease period, the option fee becomes part of the down payment. But if the renter does not purchase the house, it becomes income for the seller. 
  • Rent premium - The renter agrees to pay a certain amount every month. Usually, rent premiums are higher than the usual rent prices in the neighborhood. That's because the portion of each payment will go towards the down payment for the future purchase of the property.
  • Maintenance - Depending on the contract, the seller may ask the renter to cover the maintenance costs, repairs, property taxes, and HOA fees while the tenant is renting. It's essential to read the contract thoroughly and ask an attorney for a clear explanation of each party's responsibility in the agreement. 
  • Lease term - In the contract, the renter and the seller will agree to a specific lease term. When the lease expires, the renter may either be unable to qualify for financing or may decide to not to move forward with the home purchase; the option to buy the property will expire too. 
  • Closing process - If the renter plans to buy the property, he needs to secure financing once the lease term expires. At that point, a closing date will be set by the lender. It is when you will be provided ownership of the house as a buyer. As stated in the contract, the option money and the portion of the rent premium will be credited to you. 

There is no standard rent-to-own contract since this process is less regulated than a typical renting and buying process. In this agreement, the terms are negotiable. Before entering a rent-to-own contract, you have to talk to an attorney and real estate agent.

This will help you better understand the terms of the agreement. You might also want to consider the pros and cons of the rent-to-own process so you can decide if you are fine with the entire process.