Improve Your Credit Score With Rent to Own

A renter who has a bad credit score may be able to improve their credit status by engaging in a rent-to-own contract. This could help them get a mortgage later on when they are ready to buy a home.

The first thing you need to do when entering into a rent-to-own agreement is to understand your legal rights. Some states require a landlord to provide you with an official lease or purchase agreement that describes the terms of your rent-to-own contract. You should also ensure the property is in good condition and has been inspected by a licensed appraiser.

Another important aspect of a rent-to-own agreement is the purchase price. Typically, the buyer and seller establish an agreed-upon purchase price in their lease or purchase agreement. This is often a higher price than what the home might be worth in a normal sale to account for expected increases in the property’s value.

When you are in a rent-to-own contract, you must read the agreement closely and ask questions before signing it. This will ensure that you are clear on all the details of your contract and that your interests are protected.

Usually, the lease period is between one and three years. However, this can vary depending on the homeowner’s goals and the tenant's financial circumstances.

Determining the length of the rental term is important for both individual and institutional homeowners offering a rent-to-own option. For example, an institution might offer a two-year rent-to-own contract with the possibility of extending it for up to four more years.

This allows the tenant or buyer to make a down payment over time and avoid competition with other buyers renting the same property. It also gives the renter or buyer an opportunity to test the market before they purchase the property.

Some homeowners will even offer their tenants an “option fee” or option money, ranging from 1% to 5% of the home's purchase price. This is typically paid at the beginning of the lease, but it can sometimes be added to your down payment.

The downside is that you might have to pay a non-refundable option fee or the purchase price at the end of the lease, which will not be refunded if you walk away from the home or otherwise nullify your agreement. You might also lose any money you have invested in the option and the rent credit that you might have received during your lease.

Regardless of the option fee and purchase price, it is always a good idea to take advantage of any incentives offered by the homeowner. Some homeowners are willing to include a discount on the purchase price for a tenant who will take care of any maintenance tasks that may be required during the lease period, and these types of incentives are especially common in rent-to-own contracts where you have the opportunity to own the home at the end of your lease term.