Step 1: Find an Agent
When it comes to pursuing rent-to-own as a path to homeownership, you’ll want proper representation to make sure you find a fair, honest agreement, that is tailor made to fit your individual circumstances. This is essential, as many prospective homebuyers find themselves locked into leases, only to find out later on that buying the home is no longer a feasible option.
A trusted real estate agent will help you find the best opportunities, will negotiate on your behalf, and will make sure the agreement suits your best interests. But beware, not all Realtors are trained in this specialized type of transaction. Make sure you ask your prospective Agent if they are an experienced Rent-To-Own pro.
Step 2: Get Qualified
Rent-to-own is worth considering if you want to buy a home but are currently unable to do so. If, however, you do have a good credit score and are able to make the estimated down payment, then buying a home outright tends to be the more affordable option.
If you have bad credit, can’t afford the down payment, or want to “test” out a home before you buy it, then your next step will be to see if you qualify for a rent-to-own program. Note that the determining factor here is whether you’ll be ready to buy the home at the end of the lease period.
You can use rental property calculators to determine your estimated rental payment if you were to go the rent-to-own route, as well as to determine whether you’re qualified for such a program.
Step 3: Find the Right Programs
There are two types of rent-to-own programs: lease-option and lease-purchase.
A lease agreement with option to purchase gives the buyer the right to buy the property at the end of the lease. If the buyer decides not to buy the home, or for whatever reason can’t buy the home, then this option expires. This can mean that the tenant will have lost money by paying over the standard rent amount.
A lease agreement with purchase agreement dictates that the tenant is legally obligated to buy the home at the end of the lease. With this type of agreement, you’ll want to be certain that this is the home you want to buy, that it has been thoroughly inspected, and that (ideally) you have been pre-approved for a mortgage to make sure you qualify when it’s time to buy.
Step 4: Apply
Whether you do the lease-option or purchase-option, it’s always a good idea to get pre-approved for a mortgage, to make sure you qualify for one when it’s time for you to buy the property. Of course, this can be more difficult if you have bad credit and your goal with rent-to-own was to give yourself time to build up your credit.
When it is time to buy, you’ll apply for a mortgage just like any other home buyer. We recommend shopping around for the best lender and mortgage type for your needs.
Also, keep a close eye on your finances so you can improve your credit score, save up for a down payment, and make your rent payments on time.
Step 5: Apply
With the help of your real estate agent, start searching for properties that suit your wants and needs. Note that finding property owners who are open to a rent-to-own agreement can be somewhat difficult. Only about 5% of the market consists of rent-to-own homes, and they tend to be in real estate markets that aren’t very competitive.
Your best bet is to find property owners who might be reluctant to the idea of becoming landlords. Maybe they have tried to sell their home, were unsuccessful, and are now looking for a way to earn some money by renting it out to tenants.
Your agent might be able to negotiate with them and come up with a purchase price that works for you in a rent-to-own agreement. Without an agent, it’s smart to do your own research before talking about prices with the landlord.
Step 6: Move In
Before signing the lease, you and your landlord will have to agree on the following in regards to your rent-to-own contract:
- A time frame to transition from rent to own
- The home’s purchase price, whether locked in or to be determined at the end of the lease
- The option fee – i.e. a nonrefundable deposit, paid in addition to rent, to secure the right to
- purchase the property (typically 2.5% to 7% of the home price).
- The rent amount. Your landlord will likely set the rent above market rate so a portion of rent will
- build equity in the purchase property.
Once you’ve agreed on the terms, it’s time to sign the lease and move in!
Step 7: Manage Your Credit & Contract
The terms laid out in your rent-to-own contract will determine your rental payment, how long the lease is for, etc. Since your goal is to buy the home by the end of the lease, you will need to adhere to these terms to avoid any hiccups in the process.
This means paying your rent in full and on time, keeping the property in tip-top condition, building up your credit, and maintaining a good relationship with your landlord. You’ll also want to start saving up for a down payment so you are ready when it comes time to buy the property.
Seek out rent to own credit repair solutions so you can start building your credit right away.
Step 8: Close
A successful rent-to-own process will end with you closing on the purchase of your new home, according to the terms laid out in your agreement. Ideally, by this point, you will be pre-approved for a mortgage loan and will have saved up money for the down payment.
The rent-to-own home closing process will look like this:
- Contacting your lender to pre-qualify for a loan by submitting your basic information.
- Complete this application at least 45 days before your lease ends.
- Completing the lender’s formal loan application with a loan officer. You will be required to
- provide financial information and documents.
- Giving your loan officer a copy of your sales contract to determine whether your home
- qualifies for financing.
- Getting the home appraised to make sure the proposed price does not exceed market value.
- Closing on the home by meeting with the Escrow Officer at the closing agent’s office to finalize the sale. The lender will then send the funds you borrowed, plus apply your down payment to the closing agent to pay for the property. The seller will then contribute your down payment and any funds collected during the rent-to-own agreement as per the contract.
Need help with the rent to own process in AZ? Our team at Century 21 Northwest Realty is standing by ready to assist you in your home buying journey. Contact us today.