Rent to Buy - Know all about it before buying a house. Are you looking to buy a home but worried that you don’t have enough cash at hand? Then rent to buy (sometimes known as lease option or rent to own) may be the best choice for you.
Rent to buy and rent to own are the two commonly used terms that refer to lease option. While the term “Rent to Own” is used predominantly in the USA, “Rent to buy” is used in Australia.
In real estate, the lessee or the tenant will exercise the option to own the property after the lease term ends. This is known as exercising the lease option. In rent to buy, the tenant pays the rent to the landlord who in turn permits him to occupy the unit or home for a fixed period. Once this period ends, the tenant owns the property. In exchange for this option, the lessee pays extra money to the owner, which is usually more than the market rent.
Generally, people exercising lease options are lessees with a poor or limited credit history. Rent to Buy can be thought of as being training wheels for those seeking home ownership by giving the opportunity of home ownership to those who would of otherwise been rejected by the banks.
Those anxious to own a home but with no sufficient cash opt for rent to buy mostly for as little as $2000 however this is dependent on individual circumstances. The rest of the loan amount is split and paid throughout the loan period. Until debt is settled fully, the house does not belong to the lessee.
Yet another important question for which you should have an answer before rent to buy is: “Will I be able to secure financing at the end of the lease term?” As it cannot be guaranteed that you will be able to get a loan at the end of the lease term, you’ll have to ensure that you qualify for obtaining the loan however this will be achievable in most cases.
As the monthly payments include the house rent as well as the option money, which is used to purchase the house, you need to make sure that you can afford the monthly payments.
It is always advisable to take care of the property, protect it and make improvements as and when necessary, as it considerably increases the house’s value. This would come in handy, when you decide to exercise the lease option at the end of the lease period because you earn equity. This increase in equity helps in increasing the value of the property.
And finally, do not wait until the last minute to apply for the loan. Apply at least two months in advance before the lease period is about to expire. A lease option always qualifies for refinance loans, which are usually cheaper and faster. But also have a mortgage ready to complete the deal on the specified date.