Rent to buy properties can be a great way to get the house or condo you want if you're not quite ready to make that leap into a mortgage. However, they also carry certain risks, so it's important to understand exactly what entering into a rent to buy contract entails.
This type of home purchase begins with a period of time in which the property is rented just as with a standard lease agreement. After this initial period of renting, which usually lasts one to three years, a portion of the rent paid over that time will go towards a down payment on the home for purchase, which is set at a predetermined price. This means that the rent paid on a rent to buy property will generally be greater than market value rent.
For anyone needing some time to build up to a down payment, this rent to buy options can be a viable alternative for getting the property before being able to obtain financing. This option to purchase also works well if there is something preventing you from qualifying for a mortgage in the short run. Most lenders require a stable job history and well established credit scores for most mortgage options, and if those are things that can be remedied in the renting phase of a rent to buy contract, this can be a great way to secure your dream home or condo.
HOWEVER, there are risks to entering into this type of contract, so be sure to proceed with caution. You will almost always be paying a higher rent on a rent to buy home than you would with a standard lease agreement because a portion of it is set aside for the eventual down payment. If you are unable to obtain financing when it comes time to make the purchase, you will forfeit all money paid during the renting phase, including what was set aside for the down payment. It is also important to do all the same research on the property that you would as if you were buying. Never sign a contract without having an inspection, documenting needed repairs, checking for liens, and being completely clear on the terms of the contract. This type of home purchase works well for some, but is not the right choice for everyone.
For more information about what first time homebuyer options are right for you, how to obtain financing, and how to decide on your first home purchase, download our informative First Time Home Buyer Education eBook now!