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Suppose you are one of the millions of Americans who struggle with banks denying your requests for mortgage loans. In that case, there is a solution for you. Rent-to-own homes are attractive for many buyers due to the low credit requirement for this type of contract. As you probably suspected, both pros and cons come with the rent-to-own option. Today, we are going to explore the downsides of rent-to-own agreements.
A Potentially Higher Purchase Price
When sellers offer a property through a rent-to-own agreement, they understand that a lower credit score carries a higher risk of the buyer backing out. It is nothing to take personally, but your credit history can reflect whether you commit to making payments on time.
When you make rent payments in a rent-to-own contract, you also earn additional premium payments to go toward the eventual purchase of the home. Unfortunately, the bank will typically not refund those payments if you back out of your contract. So keep this in mind before you sign on the dotted line.
Possible Unknown Issues
This particular risk will not exist with any trustworthy landlord. However, since you don't yet own the property, there are different disclosure requirements than when you assume control of the mortgage and own the home. In that case, problems with the house and property could be unknown to you. You may discover many of these things as a tenant. Still, some may come out after the home inspection during the purchasing process.
Less Control of Property
It is important to remember that you are not any more than a tenant until you take over the mortgage on the home. You must still follow the same rules as any other rental. It means the landlord can still make any changes to the property they want, without your input, until you take over the mortgage.
Since your landlord is responsible for the mortgage payments in the first segment of the rent-to-own contract, there is always the potential that they could fall behind on mortgage payments. Even if your payments are on time, your landlord's negligence could foreclose the home. It is very uncommon, but it is possible.
Upon entering a rent-to-own contract, you agree to the home's purchase price. It can go in your favor or not. If the home loses value due to changes in the housing market, you are still required to pay the initially agreed-upon price by the time you are ready to buy it. Furthermore, you will be making a small down payment on the home at the start of your agreement. It may be a higher percentage of the actual value once you successfully obtain your mortgage.
All in all, rent-to-own agreements are beneficial when used for the right reasons. Consider these potential downsides when considering taking this significant step toward owning a home!