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The Mechanics and Benefits of a Rent-to-Own Agreement

An alternative method of buying a home is a rent-to-own agreement, also known as a lease or lease-to-own agreement. A buyer who goes into a contract like this agrees to pay the rent for a particular property within a preset duration, before deciding whether they want to purchase it on or prior to the expiration of the lease.

A rent-to-own agreement may is usually perfect for people who want to own a home but have not secured a mortgage, or those who are not yet ready for the commitment that ownership requires. For instance, your credit score may be less than impressive to lenders, but the problems that led to that score are gone and you have been consistently improving your credit ever since. Perhaps your debt-to-income ratio is excessively high, but not by a lot, and your budget can accommodate extra payments and decreasing your debt substantially over the next few years.

You may have a well-paying job, or landed one with a much higher salary, but you haven’t had it long enough for a lender to you think you have a stable source of income. Likewise, you may be successfully self-employed, but lenders think your track record is not enough to make them comfortable. Or you might have begun saving, but you haven’t saved enough to make the typical 20% down payment on a house.

If your situation resembles any of the above, then a rent-to-own agreement may just be your best bet. You can lock down a house that you like now while you improve your credit score, extend your employment or business background, add to your savings or do whatever other things that will increase your chances of getting a mortgage. And, in case the option money or percentage of the rent comes close to purchase price, you can start to build some equity at the same time.

A rent-to-own agreement works when potential buyers are absolutely sure about being able to buy the house upon the lease term’s expiration. If there’s more than a 50% chance of you moving and not buying the house, be wary. It’s improbable that a landlord or owner will want to refund rent credit and the option fee so you can have the flexibility to move.

If you see even the slimmest chance of you not qualifying for a mortgage or any other financing before the lease expires, you should probably just keep renting, fixing your credit, and saving up for a down payment. And when you’re fully prepared, you can pick any house on the market that aligns with your needs, aesthetics and budget.

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