Rent-To-Own Home Frequently Asked Questions

 

Maybe you have a few questions. That’s okay; most people do. So here’s a quick collection of some of the questions people ask us… along with our answers. If you still have a question, don’t hesitate to contact us (or give us a call) and we’ll be happy to answer it for you.

  • What is the difference between Renting-to-Own vs. just simply Renting?
  • What are some of the benefits to renting-to-own vs. just waiting until I qualify to buy a home in the future?
  • What is the process to get into a Rent-to-Own home?
  • What is the qualification process to be accepted for a Rent-To-Own Home?
  • How do I secure the property that I want?
  • What contracts are signed to seal the deal?
  • What is the average option down payment required?
  • Is my Option Fee (“down payment’) completely applied towards the Option Price and my final purchase?
  • Can I use my 401k, Roth IRA, SEP IRA, or traditional IRA retirements funds for my option down payment?
  • In regards to my Move-In Date, do I have to wait till the 1st of the month?
  • Can I have the house professionally inspected before making a decision?
  • Will I be financially responsible for any repairs during the rental period?
  • Would I need to get a renter’s insurance policy?
  • How soon should I start looking at rent-to-own homes?

 

Q: What is the difference between Renting-to-Own vs. just simply Renting?

A: A Rent-To-Own agreement (also known as a “Lease Option”) is a contract on a property that works like a lease and leads to a purchase. The lease portion is a standard rental agreement that includes monthly rent, a security deposit, a pet deposit (if applicable), and other typical terms just like renting any house or apartment. The option contract gives you the right to purchase the property after a set time period – usually around 1 or 2 years. This gives you the ability to save money towards a down payment/closing costs, repair credit, increase your income, or otherwise improve your ability to qualify for a mortgage. Unlike a regular “stand-alone” lease, there is an Option “Down Payment” (referred to as an Option Fee) that is required upfront prior to move-in along with first full month’s rent and any refundable security deposit.  This Option Fee is applied 100% towards the price of your home, which you can use for your down payment and/or standard closing costs (so it is not a “fee” in the traditional sense, but rather more like a “deposit” towards your purchase). Normally the Option Fee required varies from 3.5% to 10% of the Option Price, the exact amount of which is determined by which exact property you choose. Bear in mind that when the option is exercised and you purchase your home, you will need a minimum of 3.5% of the purchase price anyway to qualify for an FHA home loan and 10% or more for a conventional home loan (plus closing costs which can average around 3% for a buyer in most areas). Again, 100% of this money is being applied toward your future purchase.

Q: What are some of the benefits to renting-to-own vs. just waiting until I qualify to buy a home in the future?

A: There are many benefits to renting-to-own to include the following…

  • You get to enjoy PRICE PROTECTION since the option price is set at contract prior to any commitments or even moving in. The Seller can NOT raise the price a year or two later, just because local home values have increased.
  • The UPFRONT MONEY required to get started is substantially LESS, as the average Option Fee (“Down Payment”) is ONLY 4% to 5% in most cases versus 10% to 20% plus closing costs to buy a home outright. This gives you a lot of time to save up the remainder of the amount you would need that otherwise you would need all at once with an outright purchase. And again, this Option Fee money is applied 100% to your purchase.
  • You get to ENJOY YOUR NEW HOME NOW, and “Try Before You Buy” with ample time to make this house your home and to become a part of your new neighborhood.
  • There’s no need to suffer the EXPENSE and STRESS of  MOVING AGAIN from another rental into your new home in 1 to 2 years.
  • You have AN ABUNDANCE OF TIME to repair your credit, and once it is adequate enough to secure a home loan approval, you can cancel your lease commitment and become a homeowner even sooner than you’d planned for. You don’t have to WAIT for the complete lease term to expire once you are ready to complete your purchase, and you are not under excessive pressure from your lender to close immediately or even risk losing the house if your lender takes too long (the latter of which happens quite often with traditional sales). This is further illustrated by the next point…
  • Normally once you are approved for a home loan, it comes with an inflexible expiration date.  This can put a lot of PRESSURE on you to find your future home in a short amount of time, and if your loan takes longer to process for one of a myriad of reasons that are all too common, you can even lose your home in a traditional sale from an impatient seller.
  • You can MOVE IN SOONER. After receiving bank approval for a home loan, it typically takes 30-60 days until closing and thus the final date when you can move in. This can be a nightmare if you are in a lease trying to time your move out date, allowing time to give sufficient notice to your landlord (or even worse if you are trying to sell your old home). Since a Rent-To-Own agreement begins with a lease period, you can normally move into your new home in 1 to 2 WEEKS rather than in several months (which might even be extended further to your detriment if there are any unforeseen delays with the loan processing or closing process).

Q: What is the process to get into a Rent to Own home?

  1. Submit a Free Online Application to get qualified and Search For Available Rent to Own Homes on this website (OR if none of our homes meet your needs, just fill out our My Perfect Home Program form to find your ideal home).
  2. Visit the home(s) in person that you are interested in to determine whether or not you want to proceed further.
  3. Wait for the Seller’s approval of your application.
  4. Complete all contracts and submit ALL deposit funds into escrow. This deposit consists of the Option Fee (to be applied to your purchase), first month’s rent, and any security deposit (plus pet fee if applicable).
  5. Enroll in Credit Repair Program if necessary (highly recommended!). We can guide you in this process.
  6. Meet the Seller for final property walk-through, get the keys and move in at your convenience!!!
  7. Let us know if you need a referral to a Mortgage Broker or Title Company/Closing Attorney. Your Mortgage Broker will work with you to get you approved for your home loan, and a Title Company or Closing Attorney familiar with lease options (rent-to-own agreements) is instrumental to a smooth successful closing when you are ready to exercise your option.

Q: What is the qualification process to be accepted for a Rent-To-Own Home?

A: The qualification process is very simple. In reviewing your application, we will verify your rental history, employment status, net income, recurring expenses, personal background, and public records. We will also have one of our mortgage brokers contact you to evaluate your current credit and make any financing recommendations. Finally, we can recommend a credit repair specialist to work with you to review your reports and to assist you in creating the best strategy and timeline to get your credit to the level required to meet your goals.

Q: How do I secure the property that I want?

A: Your property is secured and taken off the open market ONLY once all contracts and addendums have been signed by both parties, and ALL of your funds have CLEARED escrow. Normally once a home is offered as Rent-To-Own, we schedule multiple potential buyers to view the property on a specified day(s) and the first party interested in the home that is ready to act gets the home under contract. We endeavor to always work on a fair, “first come, first served” basis.

Q: What contracts are signed to seal the deal?

A: The contracts include a standard (1) Residential Lease , (2) an Option to Purchase contract (which contractually promises you the right to buy your home at a pre-determined price “locked-in” for specified term, e.g. 12 months, 18 months, or even 24 months) and finally (3) a Purchase & Sale Agreement that “finalizes” the sale once the option is exercised.

Q: What is the average option down payment required?

A: The amount of the Option Fee (“down payment”) varies from one seller to the next, as does the length of time given to exercise the option. This amount can range from 3.5% to 10% of the purchase price, with an average of 4% to 5% in most cases. In many cases the higher the option payment (more than the minimum required), the more flexible the seller will be on other terms and the more likely that seller will accept your offer over the competition (and again, this Option Fee is applied 100% towards your purchase). In addition, you will need at least this amount to qualify for financing (e.g. 3.5% to 5% MINIMUM for an FHA loan and 10% to 20% is required for most conventional loans) and then, of course, to finally close on your purchase.

Q: Is my Option Fee (“down payment’) completely applied towards the Option Price and my final purchase?

A: YESYES. YES. You will see this throughout these FAQ again and again. The reason is that the legal term when it comes to a Rent-To-Own/Lease Option is OPTION FEE; however, this is not a traditional “FEE” that you would pay and not recoup for the “privilege” of receiving a good or service. An option fee is more like a “down payment” or “deposit”, and this FULL AMOUNT will be credited toward your purchase price for you to use as a down payment and/or closing costs. This is clearly indicated on the option contract to avoid any confusion or misunderstandings whatsoever. We wish we could change the terminology, but we’ll leave that to the attorneys!

Q: Can I use my 401k, Roth IRA, SEP IRA, or traditional IRA retirements funds for my option down payment?

A: Yes. There are specific rules that apply to each product in regards to whether it triggers income tax due (e.g. any withdrawal from traditional IRA or SEP IRA) or an early withdrawal penalty (e.g. 401k withdrawal of any amount OR withdrawal of over $10,000 from traditional IRA, Roth IRA, SEP IRA, etc). For a Roth IRA held for a minimum of 5 years, you can withdraw up to $10,000 to purchase a home without ANY penalties or income taxes due. You can also often take out a small LOAN from your 401k with no penalties, no income taxes due, and low payments that will most likely have a minimal effect on your ability to qualify for your mortgage (e.g. responsibly borrowing 3.5% to 5% for an FHA loan); however, a large loan from your 401k (limited to the smaller of $50,000 or 50% of your balance) will also not incur a penalty or trigger income taxes due BUT the monthly payments can be large and can often damage your ability to qualify for a home loan. As the rules for using retirement funds are complex and constantly changing, we suggest you contact your plan administrator for the latest rules and/or your tax advisor to determine if a withdrawal (e.g. Roth IRA) or loan (e.g. 401k) makes sense in meeting your financial goals.

Q: In regards to my Move-In Date, do I have to wait till the 1st of the month?

A: No. You can move in on the 1st, in the middle of the month, or on any day that works best for you. The move-in date is negotiable with the owner.  You must, however, submit the first FULL month’s rent PRIOR to moving in regardless of the date you choose. Then for the following 2nd month’s rent due, the rent will be prorated for the days you actually occupied the home during the previous month.

Q: Can I have the house professionally inspected before making a decision?

A: YES. In fact, we highly recommend this. Simply let us know when you would like to perform an inspection so that we can make arrangements for the house to be accessible. Any inspections must be completed PRIOR to the start of the lease option term, so try to schedule one as soon as possible after viewing the property.

Q: Will I be financially responsible for any repairs during the rental period?

A: It depends and this is a negotiable term. We request that all of our sellers commit to paying for any repair that exceeds $500 per incident, to avoid any excessive financial hardship on you. Regular maintenance (e.g. A/C or Heat, lawn, etc) is your responsibility and is of course in your best interest in order to keep the home in good condition. Any major damage to the rent-to-own home from a storm, fire, etc. is of course covered by the hazard insurance policy kept in place by the owner for the rental term. In addition, we recommend that all of our sellers purchase a home warranty and pay for that policy premium, and then you would only be responsible for any deductible (around $75 to $100 per claim) in the event that something breaks.

Q: Would I need to get a renter’s insurance policy?

A: Maybe, as this is often required by most sellers. It is a very good idea, moreover, since the owner’s hazard insurance policy would ONLY cover the house itself and it’s fixtures in the event of a disaster. All of your personal belongings and valued possessions could be lost without a renter’s insurance policy in place. In addition, these policies are very affordable, so even if not required renter’s insurance is highly recommended!

Q: How soon should I start looking at rent-to-own homes?

A: As rent-to-own homes are in high demand and usually get under contract very quickly, we recommend to start looking at our homes when your moving date is around 30-45 days away, and never more than 60 days out. The most painful experience is when you go to view a home that you really love and want, and then someone else who can move in sooner secures the home and gets it under contract.  It is sometimes possible to have a seller hold a property for you, but it would require that you pay your full option fee (“down payment”) plus the full first month’s rent, and of course, signing all contracts. This may be worth it, depending upon the seller’s and your unique situations.

 

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