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For many, that is a question that doesn’t have a simple answer. While cheap mortgages swung it firmly in favor of buying in the past, those days are mainly gone, with many finding mortgages hard to come by. There are, however, government programs in place to help individuals that may be struggling with this. If you fall within the USDA loan income limits, The United States government has taken steps to make lending more accessible for people looking for mortgages in the 97% of America that is currently designated as rural.
There are pros and cons to both, but with timing and market conditions a big factor, it can be hard to know whether to take the plunge. The current market can also be an uncertain place for sellers, unsure of their next move.
But what about rent to own? This system can combine the best of both worlds, and just may be the right option for you.
Here’s our guide on renting to own, and the pros and cons of this option.
What is Rent to Own?
The concept of rent to own is similar to vehicle leasing.
With a car, you make monthly repayments, with the option to buy the car outright at the end of a specified period, or return it to the dealer.
With rent to own, you basically do the same thing, but with a house. You agree to rent the property at a higher than average market rate. Then you sign an agreement setting a purchase date and price for the property.
The terms of the contract are agreed between yourself and the owner. The contract gives you the right to purchase the property, and have credited back to you the overpayment you made by paying rent at a higher rate.
However, if you choose not to take up the purchase option, you will not receive a refund of the rent.
This can be a complicated option. If you choose to go down this route, make sure that you work with someone who thoroughly understands it, like this rent to own Raleigh NCcompany.
Intrigued? Read on for the pros and cons.
Pros of Rent to Own
There are two parties involved in rent to own – let’s look at the pros for both.
If you’re struggling to sell your home, or are not in desperate need of the cash, then rent to own could be a great option.
You get the assurance that one of two things will happen. You will receive a higher than average rent for the property until it is returned to you, or you will receive a rental income and still cash in on the property sale down the line.
Your mortgage, taxes, and maintenance may be covered by the rent for the duration of the lease, meaning a lower mortgage settlement figure when the sale goes through.
The renter/buyer is also incentivized to keep the property in good repair, as it may become theirs shortly.
One of the big advantages could be setting the purchase price at the outset. This gives security to both buyer and seller, as whatever the market does, you both know where you stand.
Should the market dip, the seller will benefit from an above market value for the home. Also, it may be possible to add in a clause to deal with the event of a market in which prices are rising rapidly.
The main pro for buyers is that it gives a home-buying option to those who could not currently qualify for a mortgage.
If you feel confident that you will have a large enough down payment a few years down the line, or the income to achieve the mortgage you need, then this allows you to begin to enjoy the home and get your finances ready.
You also know that the premium you pay in rent will be returned to you if you choose to activate the purchase clause of the lease.
Also, if things don’t work out as planned, you have the option to simply walk away at the end of the set term. Although this would mean the loss of the premium you have paid on rent, you would have no outstanding debt to settle.
Maybe the biggest incentive – if you find you dislike the property, the neighbors, the area or anything, you can simply walk away. It’s the ultimate try before you buy.
The Cons of Rent to Own
This brief rundown of the pros may make this option seem pretty appealing, but there are drawbacks to consider as well.
One of the major drawbacks of this approach is that for the life of the contract, you are not free to market the property and release any equity that you have built up.
This means that if your circumstances change, you may find yourself in financial difficulties.
Also, if a rising market clause is not included, you may find that you sell the home for much less than you would have been able to achieve on the open market.
One of the major pitfalls is that you are at the mercy of the seller’s financial activities.
If the seller is unable to maintain mortgage payments, gets divorced or suffers some other financial reversal, then the contract could be null and void.
The home could be sold from beneath you and you will be left with no home, and no refund of your premium rent payments.
A thorough credit check on the seller is essential before signing up, but this will only reveal current problems.
Before agreeing to the purchase price, make sure you have your own home inspection and appraisal carried out so you know the price is fair. Also, set out in the agreement who pays for what in terms of maintenance.
The Verdict: Should You Rent to Own?
If you have honest and reliable people on both sides, and everything goes according to plan, this can be a genuinely great way to get yourself onto the property ladder.
But be aware that the pitfalls are many and varied. Take your time, do your homework before committing to any deal that you may later regret, or worse, may land you in financial difficulties.
Keep your finger on the pulse of the property market. Check out our guide to 2018 real estate trends to watch out for.