A mortgage is the most popular way of financing the purchase of a new house. However, not everyone qualifies for one. You must have a good credit score and cash for a downpayment – which may be out of reach for many.
However, there is another way of buying a home that does not necessarily require a mortgage – through a rent-to-own agreement. Here is what you need to know about this alternative to traditional home loans.
How a rent-to-own agreement works
By entering a rent-to-own agreement with the owner, you can commit to leasing a property for a specified period with the option of purchasing it before the lease expires.
You will first need to make a non-refundable down payment fee first to get the option of purchasing the home at a later date. The payment is known as an option fee, based on a percentage of the value of the house, and is negotiable.
Depending on your agreement, a portion of your rent can go towards financing the purchase of the house.
You may be legally obligated to buy the house
There are different kinds of rent-to-own agreements. In some, you have the option of not buying the house once your lease expires should you choose to. In others, you may be legally required to buy the house even if you don’t want it.
Remember, rent-to-own agreements are legally enforceable. Therefore, you need to be extra careful with the terms of the agreement before committing to it.
Before signing a rent-to-own agreement
A rent-to-own agreement can seem appealing if you are contemplating buying a house, but it is advisable not to rush the decision. Mistakes can be costly and derail your plans of owning a house.
Choose terms that will protect your financial interests, know what you are getting yourself into, and conduct due diligence on the property to avoid issues in the future. Lastly, understand and safeguard your rights as a prospective homebuyer to avoid losing out on the deal.