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5 Things To Consider Before Signing A Rent-To-Own Agreement

Can a rent-to-own agreement help you achieve your dream of owning an affordable home?

Before you sign that agreement, there are several things you should consider. What does it take to own a home? For most, it’s years of saving every penny just to come up with a down payment. Also, it’s doing everything possible to pay bills on time to keep that credit score high so you can secure a mortgage.

What happens in the meantime? You pay rent that probably pays your landlord’s mortgage payment. But if it was a rent-to-own deal, a portion of that rent could be going towards the purchase of the home at a later date.

This setup could sound promising to someone looking to own a home who isn’t yet in a position to get approved for or afford a mortgage, but it does come with some catches. Here are the ones you should be aware of:

1. Many rent-to-own agreements have an upfront fee.

You may be used to paying application fees and security deposits when renting a place. With rent-to-own, there’s an upfront fee as well. Unfortunately, it’s usually nonrefundable and could be quite high.

How much can such an upfront fee cost? Sometimes it’ll set you back anywhere from 3-7 percent of the purchase price of the home. This can be a tough pill to swallow if you’re low on cash.

2. Your monthly payment will be higher.

A rent-to-own agreement contains two main parts to its monthly payment. The first is the rent, and the second is the amount that’ll go towards the home’s purchase.

So, let’s say you had a rent-to-own deal for $1,500 a month. If $1,200 were just for the rent, only $300 would be leftover. Would that entire $300 go towards the home’s purchase later on? Probably not, as a portion of it would go to your landlord as a “fee” for allowing the agreement.

3. The home price may fluctuate.

Real estate values don’t always go up. They may dip due to a variety of factors, and when you sign a rent-to-own agreement, you’re locked into the home’s value at that time.

How can this become problematic? Let’s say you sign an agreement today when the house is worth $200,000. In five years, when you’re ready to purchase, it may have dipped to $150,000. Due to your agreement, you will still have to pay $200,000 for the home, even though it’s now worth far less than that.

Banks will be reluctant to give you a mortgage for more than the house is worth. In other words, that decrease in value could lead to problems getting financed.

4. You will have to pay for repairs and maintenance.

You’re no longer merely renting the home under a rent-to-own agreement. And since the landlord assumes they’ll be getting rid of the property when it’s time for you to purchase it, they probably won’t pay for any repairs or maintenance. Who will? You will.

This can be a risk if you decide later on that you don’t want to purchase the home, yet invested tons of money fixing up the place.

5. Payment issues could nullify the deal.

Make a late payment or miss it completely, and you won’t get hit with a simple fee, as an average renter would. Instead, it could void your rent-to-own agreement, and you may lose all of the money towards that purchase price in the process.

Don’t let this list discourage you, as rent-to-own can make owning a home affordable. It’s just meant as a heads-up, so you know both sides of the coin when it comes to such agreements.