With the changes to the Mortgage rules and the more rigorous restrictions in obtaining a mortgage some potential home buyers find themselves in challenging situations. Others may have a good credit but just don’t have enough of a down payment to purchase. One option to consider could be a rent-to-own agreement or basic home lease between a landlord and potential home buyers. Here’s how it works:
for an extra payment, the tenant receives an option to buy the home at a later date, for a set price, laid out in the home lease. Both parties agree that the tenant will have the right, but not the obligation, to buy the house in three years for a set price. The fee for this right, or option, is usually 2 or 2 ½ per cent of the final price. Each month the tenant pays an extra fee, say $200 that also is applied to this option price. At the end of the three-year lease term, the tenant has put up close to 5 per cent towards the purchase price option. If the tenant decides to purchase the home he can then use this deposit as the down payment and apply for a mortgage to finance the rest of the purchase. If by the end of your lease the home is worth more you still get to buy it for the agreed price. If the market collapses and prices drop then you do not have to go through the purchase. This gives you the opportunity to try out neighbourhoods or if you have bad credit you can improve it by making timely payments of rent. There is however no guarantee that the bank will give you your financing when you exercise your option you still have to improve your credit score or find a co-signer for your application. If you do not buy, you forfeit the option payment. For the landlord the tenant on rent-to-own typically takes better care of the property as this could be his one day. The profit is fixed at the time of the option. Legal advice and a Realtor familiar with leases are both important factors in a rent-to-own transaction to ensure legitimacy and avoid frauds.
Beside title check on the home, verification of ownership of the home and thorough credit and background check for the tenant the rent-to-own agreement can work for both landlord and tenants if you are properly prepared in advance.


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