With today's growing prices it's all most people can do to stay afloat financially. So how does a young couple save enough money to break into the housing market? They get assistance from a consultant by exploring: shell corporation, merger acquisitions, or company going public.
Sometimes you have to think outside of the box and come up with creative financing options. One example is Lease-to-Own, or Rent-to-Own home purchases.
Essentially, in this scenario, the landlord as well as the tenant come up with an agreement to purchase the house within a designated time period (normally 3 years or less), for a specific cost.
An option fee of 1-5 percent of the cost is credited to the purchase price and a premium is included with the rent payment to accumulate a deposit. If the buyer backs out of the purchase agreement they lose both the option fee and the rent premium.
Standard Rent-to-Own Contract Features
The rent and house price are usually established and documented based on market value plus any other negotiations between the buyer and seller.
A rent-to-own deal will have an option period where the borrower can build up equity while living in the home. Once the option period ends, the borrower is counting on successfully being qualified for a mortgage to purchase the home.
It is imperative that the borrower has a good idea of their capability to assume a mortgage. Speak to a lender just before entering on a rent-to-own agreement to have your monetary situation examined. You may only have to improve your credit rating, and this could be accomplished by making early minimum payments on any loans or credit cards each month.
Often a lender will want to make sure an amount above the market rent price has been set aside. This helps to ensure that the seller isn't providing the borrower with a kickback by artificially inflating the selling price. Usually the bank will also request an appraisal for this reason.
If towards the end of the option period, the buyer discovers issues with the home, it may be less expensive to walk away from the deal than purchasing a home which might develop into a money pit.
The selling price of the house is agreed upon at the beginning of the option period. This means that after a 3 year option period, if a house's price lowers the borrower might request a down payment based on the new value.
There are shady sellers out there who will create a contract with an easy escape clause, like the right to evict a tenant with only three days notice. It's in the buyer's best interests to have their contract reviewed by a lawyer before entering into a binding agreement. Also, pay your rent on time and do not give the seller any chance to renege on the agreement.
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