Buying property is considered a major life event that many adults will experience at least once in their lifetime. As with any significant decision, it’s helpful to move forward equipped with as much information as you can gather, and have a general understanding of that next big purchase.
If you’re in the position of looking for a lot, land, or property, and want to know the difference between owner-financing and renting to own, read on for some useful information that will help you make the right decision for you and your family.
As you explore appealing properties, you may have heard of the “rent-to-own” option in real estate. Simply stated, this gives a renter the option to buy the property in the future. Until that time, the landlord is the actual owner, and is responsible for the property’s mortgage payments. The deed is also in the name of the owner responsible for payments.
In instances where the rent-to-own option exists, the renter has the option to purchase the property but is not obligated to do so. Many consider a rent-to-own opportunity a way of trying the house out before buying it. A rent-to-own purchase is classified as a lease-purchase and will include a contract that includes a clause with the following outlined terms:
- A property’s current sale price
- Amount of rent going toward the sale price each month
- Amount of time a property can be rented before purchase (this allows a tenant more time to secure conventional financing to purchase)
Rent-to-own agreements also require a large down payment amount. The payment is typically higher than the standard rental security deposit. The monthly rent in rent-to-own transactions are also higher than a regular rental agreement, and this is to cover the amount applied to the property’s down payment.
Owner financing is the option to have property ownership transferred from owner to buyer. Owner financed agreements involve the buyer becoming a property’s new owner upon closing. In these types of transactions, the owner serves as a bank by offering to finance a purchase.
An owner-financed property includes a buyer paying off the loan after purchase occurs; this option is especially helpful for individuals with bad credit or not enough credit to qualify for a traditional mortgage loan.
Owner financing will also require a down payment lower than what mortgage companies require. An agreement between the owner and buyer will be signed in a mortgage agreement that outlines the term of the loan, its interest rate, monthly payments, and additional clauses needed for disclosure.
Advantages to Rent-to-Own and Owner Finance Options
Both financing options are a great way for people with bad or no credit to purchase properties without the need to get a mortgage approval through a bank. In the option to rent-to-own, a buyer will be afforded time to save up for a down payment to the lender, and an opportunity to rebuild or repair credit prior to financing. The rent-to-own option also gives individuals and families the chance to learn about a neighborhood, school, and the property before committing to the purchase.
In owner financing options, a buyer owns the rental property with the freedom to customize it to meet their needs. Additional benefits for buyers purchasing through owner financing is that it offers a fast closing. This means there’s no waiting for a bank loan offer, underwriter, or legal department to process and approve the application.
There are also no bank fees or appraisal costs associated with owner finance transactions, and buyers are offered flexible down payment with no bank or government-required minimums to purchase. Like the rent-to-own option, owner-financing agreements are great alternatives for those struggling to secure a mortgage through traditional lenders.
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Offering quality owner-financed lots, land, and property for sale in the beautiful and thriving Rio Grande Valley, our team of property experts can work with you to find the right spot for you.