Rent to Own Homes: How a Lease With Option Purchase Contract Works

Financing rent to own homes is a popular topic.  Are there reasons holding you back from buying a home now?  Are you in a lease with option to buy contract and ready to purchase the home now?  These are common topics we will thoroughly discuss.  Before entering a rent to own contract, check into mortgage qualification first.  It is possible to qualify to buy now.  If not, at least know where you stand and get advice for the next steps toward ownership.

Rent to Own Compared to Seller Financing

The primary difference between these two is ownership.  In seller financing, the ownership of the property actually changes hands.  The property is deeded into the name of the buyer and the seller holds a mortgage for the balance owed.  Conversely, in a rent to own situation the buyer is paying rent.  Otherwise, the buyer does not own the property but has the “option” to purchase the home at a set price in the future.

Both typically require a down payment, schedule of monthly payments, as well as a timeframe for payoff.  Most sellers in both of these want to be paid off in a shorter time frame.  Therefore a rent with option to buy will have a specific period in which the buyer must exercise their option.  If not exercised, the buyer often loses the security deposit.  While seller financing may have a balloon payment, which means the remaining balance is due at a specified time.  So each has their advantages for buyers or sellers.

Rent to Own Homes – Preparing a Lease Purchase Contract

If you’re a buyer and are considering a rent to own contract (lease with option to purchase), follow these steps for best results:rent to own homes - lease purchase contract

  • Always pay rent & deposit by check
  • Everything should be in writing
  • Hire a real estate attorney
  • Allow sufficient time to purchase
  • Get a home & pest inspection
  • Don’t exceed a deposit you are willing to lose
  • Document everything!

First of all, keep in mind that lenders cannot use a rent history from the person selling the home.  Therefore, paying by check each month is paramount.  Additionally, make sure that the seller cashes the checks immediately as lenders go by the clearing date.  Being this would be a legal contract, hire an experienced attorney and put it in writing.  It could even be a good idea to ask the attorney to perform a title search.

Often rent to own homes do not allow enough time for the buyer to purchase.  Buyers typically enter these contracts because they currently don’t qualify for a mortgage.  Common reasons include credit problems or selling another home.  Remember, don’t buy a house just because someone will finance it.  Get it inspected prior to contract.  Finally, remember that a deposit is at risk.  So keep the deposit amount reasonable and do everything possible to create a favorable scenario.  See our best rent payment practices article.

Rent to Own Homes – Convert Your Rental to Ownership

If you have an existing lease purchase contract in place, let’s check your mortgage qualification.  Hopefully most items in the suggestions above have been done already.  If not, there still may be options available.

  • Gather paperwork for mortgage processing
  • Apply for mortgage qualification early
  • Explore your mortgage options

The most successful buyers are the ones that save all paperwork.  Paperwork includes cancelled checks, contract, and more.  As mentioned above, providing proof of rent payments are so important.  Also, keep in mind that waiting 12 months is not always necessary.  Actually it helps to review your qualification as early as possible.  At least you know where you stand if not qualified yet.

Mortgage types for rent to own homes vary depending on each scenario.  Obviously veterans should consider a VA loan because of the potential 100% financing.  Another no money down option could be USDAFHA loans offer low down payment and flexible credit guidelines.  Then conventional loans also provide great terms for qualifying borrowers.  Our mortgage loan officers will explore the options and explain in detail which apply to your scenario.

Can My Rent Be Used As Down Payment?

A popular question deals with using a deposit or extra rent as down payment.  A deposit is common, so buyers obviously want to use it towards closing.  If it is worded correctly and paid by check, the deposit may usually be used as down payment.  The buyer would need to provide the bank statement proving the source of funds.  In addition, buyers often pay a certain amount as rent and an additional part goes toward the price.  There are typically two ways to count the additional payment.  First, if the extra amount paid exceeds the fair market rent stated on the appraisal, it may be counted.  For example, if the rent is $1000 and they pay $1400, the extra $400 could be applied towards the balance.  Another option is the buyer and seller could agree to lower the purchase price by the extra portion paid.

Risks of Rent to Own Financing

Like we said earlier, make sure to document everything and involve appropriate professionals.  But even if you do everything right, there are risks in a lease with option purchase.  What if the seller has a mortgage on the property?  It is possible that the seller pockets the rent yet doesn’t pay their mortgage anymore.  The buyer is expecting to buy the home in the future, but the home could go into foreclosure.  This could create a terrible situation and happened often during the real estate meltdown.  Similarly, the seller should pay the property taxes.  If not, the county could foreclosure for nonpayment.  Insuring the property correctly is important as well.  Insurance would cover against storm or other damage.  Plus the seller should ensure the type of the insurance is changed from an owner occupied policy to a rental policy.

All of the above mentioned items could risk loss of the deposit.  Another reason why a buyer should put as small of a deposit as possible.  Because even if you pay everything on time, the deposit is still at risk.

Rent to Own Homes Near Me

Not all landlords want to sell their homes, but you never know unless you ask.  A rent to own situation could be favorable to both buyers and sellers.  There are lots of ways to find rental homes including the local paper, Zillow Rent, Craigslist,  or RentToOwnLabs.  Looking to move to NC or SC?  Check out our beautiful weather and see why many relocate to NC or SC.

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Author: Russell Smith

Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.