So you are looking to find a new home. Great! Where do you start? Well, consider all of the options that are available to you. Should you rent, buy, rent to buy or rent with an option to buy? There are advantages and disadvantages to every option, so it is important to know what works best for you. Real estate is definitely not a “one size fits all” industry.
Let’s say that you want to buy your next home, but you cannot qualify for a mortgage loan with your less than ideal credit. Thats ok, where do you go from there? You can rent to buy, or rent with an option to buy while you repair your credit. So what is the difference between the two? There are different kinds of agreements you can work out with a seller. Rent to Buy agreements lock the buyer into purchasing the home at the end of the renting period, however long that may be. Rent with option to buy is a bit different. In this agreement the buyer is not obligated to purchase the home at the end of the renting period, they can opt out if they like.
If you want to rent with an option to buy, that is a great alternative to getting a home loan. Basically what you are saying is; “I may want to buy this home in the future, but I want to test drive it for a while without the commitment of buying, but with more stability than typical renting.”
This “option” to buy is the key word. Just because you are interested in buying the home in maybe five years, does not mean that you have to. Although, there is always a catch. The owner of the home will require a premium to buy the option, roughly around 5% of the cost of the home. Beyond that, the cost of rent will be higher than if you were just rent, but these higher costs will usually lower the cost of the home when you are done with the renting period. If you decide not to buy, the premium will not be refunded, you will have lost all the money you put in.
Renting with an option to buy is a great way for those with bad credit to rebuild and build equity. Furthermore since the time in which you lease the home is longer than that of normal renting, you will end up moving less and have a bit more stability. One of the major benefits of making an agreement like this is locking in the purchase price. Let’s say the purchase price is $250,000 when you sign the agreement, this means that if in five years prices have increased, you do not have to pay the increased price, you pay what you agreed to five years prior.
While the benefits of renting with an option to buy and renting to buy are great for those with low credit, there are a few disadvantages. For one, if you opt to do a rent to buy agreement, if your credit progresses slower than expected, you are still held to buy that home, and might not qualify for a mortgage loan. In that case you can be worse off from when you began. In either case, be sure to check the homeowner’s credit history. If you are renting from someone who cannot make their mortgage, or are a high risk due to their credit history, you risk the home possibly going into foreclosure while you are renting. Furthermore, falling market prices do not favor the buyer. You could end up paying much more for a home than it is actually worth since the premium was set in place.
Some wise practices to keep in mind if you are going to rent to buy or rent with an option to buy:
At the end of the day, whichever avenue you choose to go with the home buying process, be sure that you are being as diligent as possible. Know the in’s and out’s, know what you are and are not agreeing to, and weigh all possible outcomes to help protect you and your family moving forward.