If you're ready to buy the home of your dreams, but your credit or savings isn't quite ready yet, a lease with option to buy (often simply called a "lease option" or, somewhat inaccurately, "rent to own") may help you move in. Lease options, in which you lease (rent) a property and have the option to buy the property at the end of the lease term, can allow you to control a home that you want even if you don't have enough money for a down payment yet. A lease option may also be helpful if you need some time to improve your credit before you can get a good mortgage rate.
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Determine if a lease option is a good option for you. Lease options can be useful home-buying tools, but they're not for everybody. In fact, the majority of lease options do not end with the lessee (the renter or prospective buyer) purchasing the home, and while that's sometimes for a good reason, it's often just a waste of money. Ask yourself a few questions before you decide to pursue a lease option in general or before you sign one on a particular house..
- Can you afford the option money? The option money or option fee is required for a lease option contract to be valid. This upfront payment may be quite small (equal to one or two month's rent, for example), or it may be 3-5% of the purchase price. All of this money should go toward the purchase price or down payment on the home if you decide to buy the house at the end of the lease term, but unlike a security deposit, you don't get the option money back at the end of the lease if you can't purchase the house or decide not to.
- Do you plan to stay in the area? Since a lease option typically costs more than simply renting, you should be fairly certain that you want to buy the house at the end of the term. If you don't, you lose your upfront option money and any additional money in excess of the fair rental value that you've paid in your monthly payments.
- Will you be able to secure financing at the end of the lease term? In some cases the seller will finance the purchase of the home after the lease option. Most of the time, however, the buyer will need to find his or her own financing by applying for a loan. A lease option can help you get a more favorable loan than you otherwise would be able to, but it's no guarantee, so you'll want to be reasonably sure that you'll be able to qualify for a loan at the end of the term. Check with a mortgage broker or loan officer to examine your situation.
- Can you afford the monthly payments on the lease. Typically (but not always) the monthly payments on a lease will include the fair rental value plus option money that will go toward the purchase of the home. Thus, the monthly payments under a lease option will usually be more than you would pay if you were renting the same house.
- Will you be able to make the monthly payments on the home and meet other expenses of ownership? Even if you're able to get the loan, it won't do you any good if you can't afford to keep up with the expenses of owning the home. Be sure to factor in not only the mortgage payments, but also property taxes, insurance, and maintenance costs, all of which renters don't have to pay.
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Find a house you want to buy. Keeping the above considerations in mind, look for a house that you like and that you can afford. There are some companies that specialize in lease options, and there in some places government programs will buy a house for you and then offer you a lease option. More typically, however, you can just find a house for sale and see if the owner will consider a lease option.
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Discuss the lease option with the owner. Some homeowners have never heard of a lease option, and many are suspicious of them. In addition, some sellers need a lot of cash fast, and so there's no way they can do a lease option. Still, if you're lucky, you or your real estate agent may be able to convince the seller to work with you.
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Get a home inspection. Once you've found a suitable house with an agreeable seller, it's time to get the home inspected. Get an independent professional home inspector to do a full inspection so you can become aware of any problems the house may have. In most jurisdictions the seller is also required to give you a seller's property disclosure attesting to the condition of the home, but an independent inspection is still important. If there are problems, make sure they're not issues that will prevent you from getting a loan, and make sure the contract specifies who is responsible for making repairs. The lessor may also offer an allowance off the purchase price to enable the lessee to make the repairs if the option to buy is exercised.
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Negotiate the terms of the lease option. The purchase price, term of the lease (usually anywhere from 6-24 months), the amount of initial option money, and the amount of the monthly payments that will go toward the purchase price will all be negotiable. While you can find lease option contracts online, it's best to get one from a local real estate agent or attorney, since laws concerning lease options vary from state to state, and there may even be local regulations. A real estate agent or attorney can help you draft the contract and negotiate the terms, and it's important for both the buyer and the seller (lessee and lessor) that the contract be well written.
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