If tough economic times are the cause of a less-than-perfect credit score, securing a traditional mortgage may be challenging. In a 2011 CNN Money article, writer Les Christie indicates about a quarter of those who apply for a loan were turned down. Typically, lease-to-own agreements are made between two parties and rely less on credit history. Homeowners may choose to offer their house this way because they are unable to sell in a slow real estate market. Understanding some of the procedures involved in lease-to-own arrangement can make negotiations easier for everyone.
Most lease-to-own agreements require at least a small down payment. Real estate and finance guru Jack Guttentag says on his website, The Mortgage Professor, that a typical down payment is between 1 and 5 percent of the purchase price. Also expect higher rent payments. Alan Barker, owner of RealtyJoin.net and a real estate agent for more than six years, indicates in the article "The Fundamentals of Rent-to-Own Process" that lease-to-own rent is significantly above traditional rental rates.
An agreement tends to lay out details such as how much the overall purchase price of the property is, how much money the buyer is putting down, how much of the rent goes toward the principal owed after the down payment and what happens if the buyer does not pay rent by the agreed upon date. It is best to have a real estate attorney look over the agreement and point out any areas of concern.
Most rent-to-buy arrangements assume the new renter-owner is responsible for routine home maintenance. This includes mowing the lawn and making any necessary repairs. Pay particular attention to this part of the agreement and negotiate any terms that are unacceptable. For example, a buyer who is leasing to own an older home may want to pay particular attention to the roof and furnace and whether those big-ticket items will need replaced in the next four or five years.
Both parties meet at a closing to sign documents and exchange money. Mortgage companies and lawyers provide these services. This also provides a formal record of the agreement. Those officiating the closing will go over the final terms, which avoids misunderstanding later in the buying process. A lease-to-buy agreement is not an obligation, and the renter can walk away from the contract without buying the home. However, in most cases, the renter will also lose whatever money was paid down when the agreement was signed.
- Sample Lease-Purchase Policies and Procedures Manual ...; U.S. Department of Housing and Urban Development
- CNN Money: Why You Can't Get a Mortgage
- The Mortgage Professor: Lease-to-Own Purchases
- Alan's Real Estate Thoughts and Opinions: The Fundamentals of Rent-to-Own Process
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