Purchasing a home, even with non-traditional methods, is a huge decision. Homebuyers considering rent to own homes need to weigh their decision carefully to ensure this option offers them the best route to home ownership. Looking at the pros and cons of this buying method is important before making a final decision. The following pros and cons should be thoroughly investigated by homebuyers so an informed decision can be made.
PRO #1 – Easy to Qualify
The ability to easily qualify for rent to own homes offers one of the biggest pros to homebuyers. Qualification guidelines from lenders like mortgage companies and banks come with specific qualification guidelines and those guidelines are tougher than ever. Some of the common qualifications for conventional lenders include tax records, minimum credit score, affordability ratios, minimum employment history and debt-to-income ratio.
When going with the lease option, the seller dictates the guidelines, making it easier for homebuyers to qualify. In most cases, the main factors may include monthly lease payment, paying the option fee and a look at previous rental history.
PRO #2 – Immediately Occupy the Home
Homebuyers may occupy the home immediately after paying the lease payment and option fee, which is another benefit of rent to own homes. When going with traditional financing, it can take weeks or even a couple months to complete the process and move into the home. Instead of dealing with inspections, home appraisals and gathering various documents, the lease option process is more upfront and makes it easy and fast to move right into the home.
PRO #3 – Time to Improve Credit
Choosing rent to own homes allows homebuyers time to improve their credit before attempting to acquire a home mortgage. With this home buying option, buyers can work on their credit while living in the home. Before signing a contract, consider the amount of time need to improve credit and then choose a lease period that will coincide with the time needed to improve credit.
If the seller is actually providing the financing for the home, credit will be even less of a problem, offering an excellent solution to homebuyers with less than perfect credit.
PRO #4 – Try the Home Before Purchasing
Once the option fee is paid, a partial commitment has been made to the home. However, homebuyers still have the benefit of trying the home before making the final purchase.
In some cases, buyers realize that the home may not offer the benefits they want. At times, declining property values, rising taxes, needed repairs or even undesirable neighbors may make buyers realize that they do not want to buy into the situation. At the end of the lease period, one can walk away without buying the home. Keep in mind, walking away will mean that the option fee is forfeited.
PRO #5 – Save for the Down Payment
Many potential homebuyers find it difficult to come up with the down payment needed to purchase a home, since it can be as high as 20% as the total purchase price. Rent to own homes allow buyers to save for the down payment over time, making it easier to come up with the down payment needed.
Many lease option contracts allow buyers to save with a Monthly Rental Credit. Then when buyers are ready to purchase the home, owners discount the home by the amount paid into the Monthly Rental Credit, which offers homebuyers an equity down payment.
PRO #6 – No Taxes to Pay
While paying rent on the property, homebuyers have no taxes to pay. Until taking ownership of the property, the seller will still be responsible for the taxes on the property. This provides excellent savings to homebuyers, allowing them to enjoy the benefits of the home without having to shell out money on taxes until after making the final purchase.
CON #1 – May Pay Higher Sales Price
In many cases, sellers set the sales price higher for rent to own buyers. Sellers may sell at a cheaper price to cash buyers, but often try to get a higher price if going the rent to own route, since they have to wait longer to sell the property. Of course, the price of the home is negotiable. Since the real estate market is current a buyer’s market, potential homebuyers have a strong position when entering negotiations on the lease option, which often allows them to negotiate a lower price than the original asking price of the seller.
CON #2 – Potential of Lease Cancellation
Homebuyers must consider the potential risk of lease cancellation when considering rent to own homes. Late payments may cause the seller to cancel the lease. If the lease is cancelled for this reason, homebuyers may lose the option fee paid in the beginning.
CON #3 – No Tax Deduction for Interest
When buyers finance a home with traditional lending, they may deduct the interest paid on the mortgage. However, while going through the lease period on rent to own homes, homebuyers will not be able to receive a deduction on mortgage interest. For some, this may be a potential con to consider before making this decision.
CON #4 – Rents May Be Higher Than Normal
In some cases, rent paid during the lease period may be higher than normal rent amounts in the area. This may turn into a problem if the buyer decides not to follow through on the option to buy, since the buyer will have spent far more on rent than would have been spend in other rental situations. However, while the rent may be higher, part of that money usually is put towards the price of purchasing the home, which means it will pay off when the purchase is completed.
CON #5 – Potential Title Encumbrances
Homebuyers must beware of potential title encumbrances when choosing the lease option. If the property has any liens or other encumbrances against it, this can cause a substantial problem when buyers are ready to make the final purchase. To avoid this problem, having an attorney or title company verify that the title is free of any encumbrances is important. However, this research is the responsibility of the homebuyer when deciding to go with rent to own homes.
At a Glance:
Rent to own homes do away with stringent lending requirements for home loans;
Rent to own homes allow homebuyers to avoid paying a down payment;
Rent to own homes allow potential homebuyers to fix problems credit problems;
Rent to own homes allow potential homebuyers to establish credit if needed;
Rent to own homes offer the benefit of trying the home before buying;
Title encumbrances can be a problem, which the potential buyer should investigate;
Homebuyers may pay higher than normal rents;
Some sellers may have a higher asking price for rent to own homes;
The potential for lease cancellation should be investigated;
Tax deductions on interest do not apply during the lease period.