Tightening home mortgage qualification requirements coupled with a glut of homes for sale on today’s housing market may trigger many long-term renters to consider rent-to-own contracts, also called lease-to-buy options, as one way to finally purchase a home.
But is leasing a home to eventually buy it a good idea or a scam? Read on and decide for yourself.
How Lease-to-Buy Options Work
In a rent-to-own arrangement or lease option, a tenant who does not have good enough credit or the required down payment to qualify for a traditional mortgage instead rents an available home and makes an extra payment every month to the homeowner toward the home’s purchase price. Often the renter also pays an additional, nonrefundable lease option fee upfront, which also goes toward the purchase.
At the end of the lease, which is typically 12 to 36 months, the renter may then exercise his option to buy the home.
Let’s say you’re thinking of entering a lease-to-buy arrangement with a homeowner who has listed his home to sell at $121,000. Let’s also say you’ve saved $7,000 toward the purchase of a home, so you can cover a typical 5-percent upfront option fee of $6,050. Rents in your area for a comparable home are at $800 a month, so you’ll pay that plus — for example — a negotiated additional $400 a month toward the purchase price of the home, making your monthly payment $1,200.
At the end of 36 months, between your monthly $400 payments and your $6,050 option fee, you’ll have accumulated $20,450 toward the purchase of the $121,000 home.
How a Lease-to-Buy Contract Can Benefit a Renter
In a rent-to-own situation, you’re not only little-by-little buying the home. You’re also buying some time.
For renters who are rebuilding their credit, looking for a better-paying job, or saving toward a bigger down payment, that time is invaluable. The lease option contract allows you to quickly move into the home you want, but puts off the mortgage qualification process until a later date.
Another benefit is that you can use the 12- to 36-month lease period as a trial run of home ownership. You might want to see if you like living in a particular neighborhood, or if the house keeps warm enough in the wintertime, before committing to buy it.
How a Lease-to-Buy Contract Can Burn a Renter
Home leasing to buy is not without its risks. Plenty can go wrong.
For one thing, your lease option contract may guarantee you the opportunity to buy the home you’re leasing, but it doesn’t guarantee that you’ll qualify for financing. You’ll still have to go through the mortgage qualification process as the end of your lease approaches.
If you can’t qualify, you’ll most likely lose every dime you paid toward the down payment; very few lease-to-buy contracts include provisions for a refund of your down-payment money.
In addition, many lease-to-buy contracts allow the homeowner-landlord to cancel the contract and evict you if you miss or are late on one of your monthly payments. In this scenario, too, you would forfeit the money you’ve paid toward the home’s down payment.
A 2009 CNN Money article on the pros and cons of lease-to-buy contracts warned of these and other potential problems that may burn a lease-to-buy tenant, including the scary prospect of unknowingly signing a contract with a landlord who himself is facing foreclosure. Should the landlord lose his home, the bank that repossesses it is under no obligation to honor your contract. In fact, you would likely be evicted and, again, lose the money you paid toward the purchase of the home.
Tips for Home Leasing to Buy
If you are seriously thinking of entering into a lease-to-buy contract en route to home ownership, follow the advice of the experts at Realty Times, a leading real estate news and information website visited by half a million users each month.
They say that you should always hire a real estate expert to assist you with any home-buying contract you sign. They also advise you to verify that there are no liens on the home you want to buy, and to make sure you understand all the terms of the agreement, including your rights and obligations if, at the end of the lease, you do not exercise your option to buy the home.
Author Experience in Property Management
Les Christie, “Rent-to-Own Your Home: Pro and Con,” CNN Money
Phoebe Chongchua, “Lease-to-Buy May Be Good Option,” Realty Times