Lease Options or Rent to Own?

Editor's Note: At least once a day a home buyer asks me "what is the difference between a lease option, and a lease purchase?" The article below answers the question quite well.

Lease Options or Rent to Own?
by: Alexis Dey

Finding a rent-to-own house is one of the many ways someone with bad or no credit can buy a house. You will often find them called names like lease/options, lease with option to buy, lease purchase, lease 2 purchase, rent with option to buy, rent to own, or rent to buy homes.

There are a few differences between rent-to-own and lease-option agreements, although many people use the terms interchangeably. With a rent to own (or rent to buy) home, the buyer makes an agreement with the owner that part or all of the rent money will go towards the down payment of the home, and at a certain date, perhaps 2-5 years in the future, the renter will purchase the home, using the money that was set aside as the down payment.

There is usually not much money put down in the beginning, outside of what would normally be needed for a rental home, so this is a good way to get into a home for little or no down payment.

Editor's Note: In many cases, you will need to put down a percentage of the house value, or an amount equal to 1-2 month's rental. The more you put down, the more secure the seller will be. Perhaps they will reward you for that security by applying part of your rent each month to your account? Ask!

Another advantage to a rent to buy situation is that if you compare how much rent money is applied monthly to the home price, even if it is only 25-50%, it will still be much more money paid on the principal of the house than if you had taken out a loan for it. If you look at how much money goes to the principal payment of a home with a typical mortgage loan, you will find that most of your mortgage payment in the beginning is just paying interest on the loan. A rent to own agreement, where the money goes directly to the payment of the home, could be saving you a lot of money in the long run.

With a lease-with-option-to-buy, a renter signs a lease agreement (often for a shorter period of time, like 1-2 years, but it could be longer). The renter/buyer usually pays a sum in cash, usually non-refundable, to the owner in agreement to buy the house at a later date for the price agreed upon. The renter has the option or right to buy the home, so in the end they have a choice and can back out it they want. Some of the rent paid may or may not go towards the purchase price of the home.

This is a technique often used by real estate investors in periods when the interest rate is rising fast. This way they hope to buy the home at a lower interest rate on a later date. In the meantime, they will sublease the home to someone else, who will make the payments for them.

Again, the terms "lease option" and "rent to buy" are pretty much used interchangeably today, so check with the owner to find out exactly what terms they are offering. Or approach an owner with your own offer for renting to own.

If you are a renter who is tired of paying someone else’s mortgage and want to own your own home, this is one of many ways that you can buy a home. One of the drawbacks is that you will still need to purchase the home at a later date. This may be a problem if you have bad credit, because you may still need to qualify for a loan when it is time to purchase the home. If your credit can be repaired in several years, this may be a great way for you to get your home now, and good motivation to clean up your credit for the future.

About The Author Alexis Dey From the book "Buying a Home When You Have Bad Credit-- 12 Ways to Purchase a House When You Can't Get a Home Loan" by Alexis Dey. © 2005-6 Mohave Publishing. All rights reserved. For more ideas on how to buy a house when you can’t get a home loan, look for our exclusive FREE e-book, “Buying a Home When You Have Bad Credit,” which can only be found on our site at http://I-can-buy.com For free rent to own agreements, as well as other free real estate contracts and forms to download in PDF format, check out our site at site at http://I-can-buy.com

Editor's Note: This type of financing tool may be right for you, but the key is what happens after your lease term is completed. Can you get financing? This is the most important question to ask.