While rent-to-own immediately makes me think of furniture stores that specialize in this method of sale, they conjure many random thoughts for those not familiar with this process. The least of which is likely "for sale," given that the signs use terms like "lease" and "rent," two terms that aren't often associated with a property that is for sale.
However, in terms of property, that is EXACTLY what terms like rent-to-own and lease option are meant to denote. Quite simply, lease options exist as a way to more creatively get buyers into homes, especially when banks aren't ready to lend to a certain buyer because of barriers like credit score and traditional down payment terms. So, if you've ever been denied home ownership because of a bank's requirements, this may be the option for you.
Let's explore the process. It's actually quite simple when you break it down.
1. Binding Fee. Much like a home sale, which generally requires a down payment, a lease option requires a binding fee, a very similar security instrument. However, this down payment is negotiable with the seller, but at least 5% of the purchase price of the house is generally expected. Some sellers have set down payment prices or percentages. You make this binding fee when you are signing the lease option agreement. This binding fee gets you in the house, but it will also go toward the purchase price when you buy. One caveat here to note here is that while a binding fee secures your future option to purchase a property, it is non-refundable should a buyer opt out of the eventual purchase. Also key in that option agreement (which very much resembles a standard purchase and sale contract) is going to be the amount of time between the day you move in and the day you buy the house outright, and the purchase price of the house. We'll get into that more in a second.
2. Monthly lease payments. You'll make these in the same manner you would if you were renting the property. Monthly payments between the move-in date and the purchase date do not typically help toward the purchase price the way that a down payment does. However, this period is what sets a lease option apart from a standard sale or a standard lease. What you are doing in this time period until you buy the home is getting all your financials in order, the ones that kept a bank or other lending institution from lending you the money to buy the property in the first place. If your credit is too low, you're working on paying down the amounts that are weighting your credit score down, or working with a credit counselor.
3. Purchase the property. Now, after however many months you specified in your lease option contract (or sooner if you can) you've built up a solid enough financial record or found a lender who will lend you the purchase price. It's vital to the success of this plan that, in the time between signing the agreement and purchasing the home, that you are working with a reputable mortgage broker and credit repair consultant to clean up your personal finances and make yourself a more attractive home loan recipient. That purchase price should have been agreed upon in writing way back when you put down that down payment money, and you set a specific amount of time in the lease option contract as well. And don't forget - your original down payment now counts to pay down your purchase price. For example, if you paid $3,000 down on the day you signed the lease option agreement, and the agreed upon purchase price was $78,000, that $3,000 goes against the $78,000 to make your new purchase price $75,000.
And that's really all there is to it. So if you are looking for alternate entries to home ownership, start looking into lease options. It's kind of like layaway: you lock in a price, pay it down a little, then pay it off when you can. For a look at the lease option properties we currently have, check out the Auben Homes lease option homes.
Posts
