Rent To Own Homes for Low Income Families

Categorized as Rent To Own Homes

Prices continue to rise and wages remain stagnant — it’s an unfortunate truth that many people today are struggling to meet their day-to-day needs, to say nothing of buying a new house.

Yet, shelter is a basic human need. It’s unrealistic to expect the millions of low-income families in America to simply give up on the dream of owning their own house, even if it will likely just remain a dream for many.

There are significant barriers to securing a traditional mortgage, including a good credit score and sufficient cash for a downpayment.

So, what’s the alternative? A rent-to-own agreement.

In this article, you’ll find information on what exactly a rent-to-own home is, what you need to consider when signing an agreement, the benefits and the risks to buyers, and whether or not it is ultimately a good idea for low-income families.

What Is a Rent-To-Own Home?

The rent-to-own process is a bit more complicated than either renting or buying outright. At its base level, a rent-to-own agreement is one wherein you first rent a home for a certain amount of time, and afterward, you can buy the home when the lease expires.

They consist of two parts: a standard lease agreement and an option to buy. The standard lease contract is one that you will likely be familiar with, as it’s similar to what you would sign as a typical renter.

However, an important addition to this contract is that it gives the renter exclusive rights to purchase the home at a specified point in the future. To this end, part of the upfront fee and monthly rent will go towards the home’s purchase price.

While any two individuals can enter a rent-to-own agreement, it is also sometimes used as an option for affordable housing programs or programs meant to revitalize neighborhoods.

Is Rent-To-Own a Good Choice for Low-Income Families in 2022?

Rent-to-own truly does seem like a good idea on paper — it’s someone giving you the opportunity to buy at a lower-than-market rate in exchange for a period of renting, just because they’re considerate of your financial situation.

While some bleeding-heart property owners do exist out there, it’s important to be skeptical.

Did they cut corners during construction? How much will maintenance cost you in the future? What if the house doesn’t appreciate over time?

These are all valid questions to ask, especially when a home is a huge commitment and your finances are strained enough as-is.

It’s downright impossible to predict what will happen in the future, which is why some rent-to-own agreements don’t end well for the buyer.

As every individual’s situation is different, the most important aspect of determining whether or not a rent-to-own agreement will be a good idea for you is by first doing your research.

What To Consider When Signing an Agreement

There are no hard and fast rules to a rent-to-own agreement, so no two are exactly alike. Some important aspects you need to consider when looking over the contract are:

The Upfront Fee

The buyer typically has to pay a one-time, non-refundable upfront fee called option money, option fee, or option consideration.

This is what gives you the option to buy the home later on, and it typically ranges between 1% to 5%. In some contracts, this fee can be used for the home’s purchase later on.

Lease-Option vs Lease-Purchase

These are the two main types of rent-to-own contracts. A lease-option contract gives you the option, but not the obligation, of buying the home.

A lease-purchase contract, on the other hand, makes you obligated to buy the home. Ideally, you want a lease-option contract that doesn’t lock you into buying a home you might not want or can’t afford at the end of the lease.

The Purchase Price

Typically, the home’s purchase price is agreed upon when the contract is signed.

It will likely be at a higher price than the current market value to account for future appreciation, so be sure that you have a clear breakdown of how the purchase price was determined to avoid overpaying.

How Much Rent Goes to the Principal

Your rent during the lease will be slightly higher than the going rate for the area.

This is unavoidable as a portion of your payment is meant to apply to the eventual purchase of the home, but you need to know just how much of it is actually going to the principal.

Maintenance and Repairs

Most rent-to-own contracts push the responsibility of maintenance and repairs to the buyer. Check the contract for what exactly you’re expected to handle out of pocket — is it just mowing the lawn or will you have to finance a roof replacement?

Benefits vs Risks for a Rent-To-Own Buyer

To give you an even better idea of whether or not a rent-to-own agreement is right for you, here is a summary of its benefits and risks.

Benefits

  • If you can’t qualify for traditional home loans due to bad credit, you can start the process of buying a house and building up your credit score.
  • You’ll save money with an agreement to buy at the current price after several years in the future, when market prices may have gone up.
  • You can “test drive” the home before fully committing and learn about issues with the home or the neighborhood.
  • Renting a house you’ll eventually own will reduce the cost and hassle of moving every few years.
  • You can build equity as your payments accumulate.

Risks

  • If you don’t buy the home, you’ll lose the extra money you paid.
  • Your progress in improving your credit or income may be too slow to allow you to qualify for a loan when it’s time to buy the house.
  • You’re at risk of your landlord losing the property through foreclosure.
  • You might not be in charge of major maintenance decisions.
  • Home prices might fall below your agreed-upon price.
  • Depending on the terms of the contract, a single late rent payment might void your option to buy the home.
  • You might find problems (e.g. title problems) you didn’t know about until you try to buy the home.

Conclusion: Are Rent-To-Own Homes Worth It?

Ultimately, you’re the only one who can decide whether or not a rent-to-own agreement will make sense for your situation.

There are many risks inherent to the process, but if you’re equipped to handle them and you make sure to review the contract carefully, then you might just find yourself on track to owning your dream home.

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