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Understand Rent-to-own Home Buying

By Elizabeth R. Elstien

Rent- or lease-to-own homes can help people who have poor credit begin the path to homeownership. Designed for those who can pay a monthly "mortgage" installment, a lease-purchase option may be the ticket to homeownership for some. "If you understand what's expected and learn to avoid predatory practices, a rent-to-own option may be for you.

How does this process actually work? First, you move into the home and begin a lease that should specify all terms and interest rates/fees related to the lease and purchase option. There is normally a nonrefundable upfront fee with a percentage of rent paid to be applied to the mortgage should you decide to purchase the home. The option to purchase comes into play at a designated date as specified in the lease, frequently when your lease expires, at which point you will be expected to obtain a loan from a lender.

If you decide not to or are unable to purchase upon lease expiration, the money paid is considered rent, and you have no equity in the home and will have lost any fees paid. You may be allowed to continue living in the home if there is a renewal option while making monthly rental payments.

While some lenders offer lease-to-own programs, it is more common to work directly with the homeowner or their manager. Although there are many honest homeowners selling their home this way, be wary of any rent-to-own deal, as scams are rampant. Read the fine print and have a lawyer of your choosing look the contract over if you are skeptical.

Some dishonest lease-to-own purchase options promise "no qualifying," which is false advertising. Once the designated lease is up, you still will have to qualify with a bank or other lender to obtain a loan to assume the remainder of the home's mortgage. In addition, the lease may state that funds paid may only be applied toward the mortgage if "paid on time," so it is important to read the contract in detail to spot undesirable wording.

Beware of lease-purchase options that state the renter is required to take care of all home maintenance, as this is a way that many unscrupulous landlords shift all large repair bills to the tenant. It's a wise investment to have a home inspector check out your future home to ascertain its condition before entering into any contract.

A rent-to-own purchase option may work for you if you understand the obligations and expectations of acquiring a home in this way. Be certain you carefully read the contract to weed out homeowners that are dishonestly trying to make money or have their home repaired for free and those with the intent of having the renter fairly purchase the home.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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