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What you should know about rent-to-own agreements when purchasing a home

Indiana real estate attorney

Not everyone can afford to buy a house, either due to limited income or a poor credit rating. Indiana residents dealing with financial constraints may have other options, however.

A process dubbed rent-to-own may be the best option, according to The Street, a personal finance publication.

Rent-to-own agreements only apply to tenants who have already rented a home or plan on leasing. A lease term in a rent-to-own agreement is usually 1-5 years. The agreement allows tenants to apply a portion of the rent they have already paid as a credit toward their mortgage down payment.

How does a rent-to-own agreement work?

The Street offers an example of how rent-to-own works:

  • The purchase price of the home is $300,000.
  • The tenant who wishes to purchase the home has been leasing for three years.
  • The monthly rent is $1,650 — $300 of which is applied toward the down payment.
  • A $10,800 down payment has been applied by the end of the lease term.

The price or value of the home in a rent-to-own agreement can change, depending on these factors:

  • The market value of the home may increase by the end of the lease.
  • The contract may increase the purchase price each year throughout the lease.
  • The purchase price of the home may be fixed at the time of signing the contract.

What are the types of rent-to-own agreements?

There are two types of rent-to-own agreements: lease-option and lease-purchase agreements. Here is the difference between the two:

  • Lease-option agreement: The tenant gives a nonrefundable payment at the beginning of the lease term which is applied to a down payment on the mortgage. For example, if the purchase price of the home is $300,000, and the rent-to-own contract requires a 3 percent nonrefundable payment, the tenant would pay $9,000 at the beginning of the lease. If the tenant decides not to purchase the house, that money will not be refunded, however.
  • Lease-purchase agreement: Unlike the lease-option agreement, the tenant doesn't provide a nonrefundable payment. Instead, the down payment on the mortgage is factored into the rent, thus, resulting in higher monthly payments. The date and price of the purchase are also established at the beginning of the contract.

Is rent-to-own right for me?

If you can't afford a down payment on a home or are struggling with poor credit, rent-to-own may be your best option for purchasing a home. Here's why:

  • You don't have to come up with a down payment right away.
  • You have a place to live while getting back on your feet and repairing your credit.
  • Your landlord may be responsible for making repairs during your lease, depending on the terms of your contract

There are some risks to entering a rent-to-own agreement, however. According to Brooklyn Law School professor David Reiss, a single missed payment can result in the agreement being terminated.

"There are a lot of shady operators out there, since rent-to-own transactions can be very complicated," he said.

You should always consult with an experienced real estate lawyer if you plan on entering a rent-to-own agreement. Rent-to-own can be alluring to new home buyers or those who struggle financially. The attorneys at Indiana law firm Hocker & Associates LLC can ensure that the process goes smoothly and that you're not wheedled into a potentially harmful contract.

Contact us online to find out how we can help you.

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