How Do Rent To Own Homes Work In Birmingham ?

Rent to Own Home Birmingham, AL

One of the first questions we get from potential buyers of our Birmingham Alabama rent to own homes and lease option homes is “how do rent to own homes work in Birmingham?”

Rent-to-own homes have become a popular option for people who are deciding whether to purchase or rent a home and can be a good way to lock in a specific home while giving themselves time to prepare for home ownership. Most buyers will need a mortgage in order to finance the purchase of a new home but to qualify you need to have good credit, cash for a down payment, two years of tax returns, low debt to income ratio, and various other lender required documents. Rent to own can also be a good option for borrowers having difficulty qualifying for a traditional 30 year fixed rate bank mortgage.

Renting to own offers advantages to both buyers and sellers. Think of it as try before you buy!

For the seller, they have steady income to make steady mortgage payments, while the buyer has a period, typically a year or two to organize his or her finances and secure financing to buy the house.

So How Does Rent To Own Work?

Rent to Own is a relatively straightforward process, though it can be confusing for first timers since it is essentially a “hybrid” option.

A common misconception is that the renter can live in the home and pay rent over a period of 20, or 30 years, then own the home. It’s slightly more complicated that that, but not much.

There will typically be two parts to the agreement. The lease agreement for when you’re renting and a separate agreement outlining your option to buy.

Here are the basic elements of a rent to own agreement. 

Length of lease: This will spell out the length of time you can rent without exercising the option to buy. Most rent to own agreements are typically longer than a standard rental which are typically for 1 year terms. Many rent to own agreements can be as long as 5 years. This should give you enough time to repair your credit if that is the main issue for not qualifying for traditional financing or save up for a down payment for a bank loan. Once your lease is nearing it’s end you will want to contact a mortgage lender to see about getting pre-approved for a loan to make sure you’re able to move on to the next steps in the home buying process. You may also choose to get an inspection done at this time.

Monthly payments: will state the monthly rent for a set period of time. Paying an extra fee or premium each month is standard however those funds are put towards the down payment essentially serving as your own savings account. All of this is geared towards helping you eventually being able to buy the house with traditional bank financing. For example say you pay $1,000 each month in rent for 2 years and $200 is credited toward the purchase price. When the lease is up you’ll have $4800 already saved up for your down payment.

Purchase price: Although the renter will be renting for some time, you will have the option to purchase the home at an agreed upon price NOW at the expiration of the lease agreement after the agreed upon time period. We all know that real estate typically only goes up in value so it’s likely that by the time your option to buy comes up the home could very well already be worth more than the price you’re actually buying it for. Win!

Option Fee: The option fee is a one time nonrefundable fee that holds the home in your favor an gives you the option, but not the obligation, of buying it when your lease expires. There is no set or standard fee however it typically will fall around 1-5% of the homes purchase price.

Maintenance: Since this is a hybrid agreement, maintenance roles will need to be defined and agreed upon. During the lease portion the landlord will still own the home but if you have hopes of buying it one day you’ll also have good reason to want to keep the property in tip top shape – or you may both feel that’s the other persons responsibility. Either way it needs to be agreed upon in writing before handing over the keys.

By giving a potential buyer a year or two to get their financial house in order, the seller can continue to make mortgage payments on the home, while living elsewhere. This is beneficial to the buyer because if they’re sure that they can acquire financing, they can usually begin customizing the home to meet their needs and preferences… essentially treating it like you own the house (because you may own it someday!) and having that sense of home ownership during the process.

*TIP: There is a difference between lease option (rent to own) and lease purchase so make sure you know the difference. Lease option gives you the OPTION of buying the home after the lease period ends. You do not HAVE TO, it just gives you that option and you can always back out. With a Lease Purchase agreement you are legally obligated to buy the house once the lease period ends.

How Does The Monthly Rent Work With A Birmingham Rent To Own House?

Really it depends on the location of the house (there may be different laws that dictate what you can do in different states) and any new federal guidelines that may come out from when this post was written may limit what the property owner of the rent to own house may do.

But the standard guidelines of a rent to own house are pretty simple.

  1. You agree on a rental rate and a future purchase price upon the end of the rental lease sometime in the future (usually 1-2 years).
  2. You first pay an upfront payment to move in and secure the contract and the terms with the option to buy. The “option fee” or “move in amount” may in some cases act as a percentage of the down payment on the home, should the renter decide to purchase at the end of the term. This may or may not be the case depending on when and where you’re reading the article (based on laws). Connect with us directly for the local Birmingham Alabama Rent to Own laws.
  3. You pay the monthly rent payment. This is no different from paying rent in any normal rental situation.
  4. At the end of the rent to own agreement (usually 1 – 3 years) you decide if you want to purchase the home for the price you agreed on initially in your rent to own agreement. If you want to buy the home, great!  We can assist you in getting qualified for a conventional loan to buy the home.  If you don’t want to buy the home, no biggie. You’re not required to buy the home at the end of a rent to own agreement in Birmingham… the choice is fully yours.

So, for the question of “how do rent to own homes work in Birmingham“… well that’s the basic process. Pretty simple eh?

While there are lots of benefits of renting to own a home here locally… every housing option has pros and cons.

Just do your research, talk with reputable and experienced companies like Home Buyers of Alabama who can walk you through the local Birmingham rent to own house process… and make the smart financial decision for you and your family.

Many people choosing rent-to-own may have past credit problems, or may just be unsure if purchasing a home is right for them. If that’s you and you want to look into the rent to own process and even see the available rent to own / lease option houses here in Birmingham Alabama, click the link below and fill out your basic info to get on our Birmingham rent to own home list

In an era of uncertainty in the real estate market, many Americans are finding that rent-to-own homes provide them with both flexibility, and the option of purchasing a home at the end of the term. By understanding how rent-to-own homes work, you can position yourself to take advantage of the many benefits of renting to own, and realize the American dream, despite any past credit problems.

You Should consider a rent to own home if:

  • You need time to qualify for the best rates and terms on your mortgage
  • You need financial discipline. It can be challenging to save for a down payment each month but most people wont skip paying rent so renting to own can be a viable way to help save for that down payment.
  • You’re certain that particular house is where you want to live. These agreements only make sense if you’re certain you want to be a home owner one day and the house you pick out is the one you want to buy.

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Talk With Us About The Birmingham Rent To Own Process at (205) 379-8185 or
fill out the form here to see available rent to own houses! >>

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