When looking into home-buying options, you may sometimes be offered a rent-to-own agreement, or lease option, as a purchasing method. Renting a home to own (also known as leasing) is similar to renting altogether, except that it offers an option to purchase the property after a certain period of leasing time, and number of payments, has been met.
When can this Option be Helpful?
Buying a home can be an expensive, and sometimes challenging, endeavor and down payments aren’t always easy to make. In fact, it can take up to 6.5 years on average for a household to save up for a down payment on a new home. This is especially true when you need to make a 20 percent down payment on a home that’s already at the higher end of your budget. A lease option allows potential buyers to move in while saving up for that down payment, and/or building credit for a better interest rate and mortgage terms in the long run.
This option can also be helpful for those who wish to make a thoroughly informed purchasing decision. Buying a home calls for a lot of research, from checking out local schools and the neighborhood, to seeing what there is to do nearby. A lease option allows tenants to essentially “test-drive” a new home. This will help them get a feel for how they like the surrounding community, and even allow for them to get to know the neighbors before committing to a purchase.
How a Lease Option Works
When and if you sign a lease with the option to buy, you should treat the property and contract as if you fully intend on purchasing. For starters, have a home inspector take a closer look at the house, and make sure it’s one you actually want to own before you sign anything. You will most likely pay an up-front fee for the option to buy, but your rent shouldn’t be any higher due to the agreement, so keep that in mind when negotiating.
Next, pick a time frame that allows you to save enough money to make a down payment and/or raise your credit to a helpful number. If it will take you three years to get to that point, don’t sign a lease option for less. Make sure to allow yourself the time you need, in order to avoid an uncomfortable situation later.
If you aren’t sure how long it’ll take to be capable of making the down payment or have sufficient credit, consult a mortgage broker. This person can help you determine an accurate timeline. Finally, pay attention to your option fee percentage. A general rule of thumb is that 1% of the purchase total is a reasonable fee. Most of the time, that fee is non-refundable, so try to ensure that it will go towards the final purchase, when it comes time to buy.
Partner with Clearview Realty
Are you interested in exploring the freedom that a refinance loan could offer you? We offer a comprehensive range of mortgage services designed to help you get your dream home, whether it’s in the city or the suburbs. Contact Clearview Realty today to learn more about your borrowing options by calling us at (720) 217-5731.