A “rent to own / lease to own”, agreement is exactly what it sounds like – a tenant lives in a dwelling and starts paying rent on it – but at a predetermined point in time he will have the option to purchase that property at a previously agreed price. Other terms that describe this sort of arrangement include lease to own, lease option, lease purchase or lease purchase option.
In most cases, this situation involves two separate contracts that run concurrently. One is the lease that the tenant signs with the property owner. It sets out a particular monthly rent (often at the top of the area market) and has a previously agreed term. Usually, you’ll find a term of two to three years is typical as tenants need that much time to get their credit score and/or income history to the state that lenders will approve a mortgage at the time of purchase.
The other contract is the purchase agreement. It contains the purchase price, the date of the purchase and the amount of the down payment that the tenant will make. The agreement generally begins with a deposit (typically at least $5,000). Then, in addition to the rent, the tenant gives the buyer a portion of the down payment, to be at the purchase date. So if the purchase price of the home will be $400,000, and the tenant wants to put down 10% ($40,000), and the lease term is three years, the tenant would need to pay $972.22 per month in addition to the rent. This assumes a $5,000 deposit, which leaves $35,000 to be paid out over the next 36 months to get the full down payment in place.
There are some risks involved in this process. If the tenant cannot get qualified for a mortgage in time to complete the purchase, the owner may be willing to extend the term. If not, though, the deposit and the down payment money all convert to additional rent and become the property of the owner.
However, there are also a number of benefits – for those who cannot qualify for a loan today but want to get some sense of security about purchase price in a rising property market, this can be an ideal program. Also, the discipline of monthly saving toward that down payment can build habits that will last long after the purchase price. Finally, you don’t have to wait through another lease or two to get into the house that you want – you can get in there now and start building your down payment to purchase it while you get your credit into good standing.
Amansad Financial has a variation of the rent-to-own / lease-to-own program. However, there are some differences between the program that we offer and those of our competitors. We can refer you to companies that run programs with different terms, but these are the requirements that we have established.
- We require the property to have about 15% equity or more.
- We will only work with homeowners that are currently living in their homes who can no longer afford the high interest of private mortgages or who are on the brink of foreclosure or power of sale proceedings, or in their redemption period.
- We perform these transactions as part of an Investors Purchase Refinance (IPR). The home owner sells the property a private lender/investor, and the property owner will be responsible for improving their situation saving the required down payment to buy the home back in 60 months
- Our preferred properties are owner occupied homes
- Preferred properties are single family detached, semi-detached, townhouses and duplexes within urban markets. Condo townhouse properties are considered on a case by case basis.
If you have any additional questions, please reach out to Amansad Financial today. We will review your current situation with you and recommend the best way forward for you and your family. Even if we don’t represent the best choice, we may be able to refer you to a company that can help you.