Is Rent to Own Right for Houston First Time Home Buyers?
Image by Diana
Hi, first time home buyers, there are many people that would like to own a home but are not able to, for various reasons. If your reason include high debt-to-income ratio, lack of down payment or low credit scores, then rent-to-own program may provide an alternative solution for you.
In a nutshell, rent-to-own is a signed agreement to lease a home for a certain period of time, usually between 1-3 years with either the option to buy the home or an obligation to buy it. The purchase price is agreed upon and a non-refundable option fee between 1%-7% of the purchase price is usually required upfront. In addition, typically, a portion of the monthly rent payment can be applied to the purchase of the home.
There are two different types of rent to own contracts. The first one is the lease option, which gives you the right to buy the home when the lease expire, however, you are not obligated to buy the home. In other words, you can change your mind about buying the home at the end of the lease and your contract/option simply expires and that’s it.
The second is the lease purchase, which requires you to buy the home at the end of the lease. If you fail to meet the obligations that is outlined in the lease purchase agreement, you could be sued. Let's say, you could not get funding to purchase the home at the end of the lease, the seller would be able to sue you for breach of contract. If you are not sure you will qualify for a loan by the end of the lease term, or raise your credit score, you may want to avoid this option.
How it Works
To qualify, if you are working with a company like Divvy, you will need to submit an application along with pay stubs and or banks statements.
Employment will be verified along with a hard credit check.
Upon completion and verification, you will receive a specific amount. For example, based on your financials, you may receive a rental amount of say, $2,500. This means you can lease a home up to $2,500 a month.
Working with your REALTOR, you will then find a rental home within that price point.
A company like Divvy, list their own homes, the purchase price and the rental price on their website.
If the home you choose is on their website, you will just need to complete the rest of the process.
If you choose a home that is not listed on their website, they will buy the home for you and lease it back to you.
A one-time non-refundable upfront payment will be required. Usually between 1%-7%.
The contract will specify the purchase price and terms.
Please keep in mind working with a company will be different from working with an individual rent-to-own home seller. Their terms may be longer or shorter and the required upfront down payment will most likely be a higher.
Things to be Aware of
Once the home price is set during the initial phase of the process the buyer can purchase the home for that price at the end of the lease—regardless of what the home is actually worth
You will be required to pay an option premium upfront.
Your signed contract will include the amount of the monthly rent plus any additional amount you are required to pays each month.
Additional amount is usually credited to the purchase price.
The rent to own home price may be higher than the value of the home.
The contract will stipulate who is responsible for regular upkeep of the property.
Read your contract, to fully understand what costs you will be responsible for during the term of your lease.
You may want to consult a real estate attorney to review the final contract before you sign.
If you change your mind about purchasing the home, you will need to notify the company. A relisting fee may be charged to put the home back on the market.
Thank you so much for stopping by. Until next time...Diana
Image by Diana for First Home Houston
