Rent to own is when you lease a home but have the option to purchase it at any time during your lease period or at the conclusion of the lease. During that time the owner agrees that they will not market the home for sale because they have, in essence, promised to sell it to you. The first part of the rent to own agreement spells out what your monthly rent payment will be, and the second part binds the seller to sell to you at an agreed price, provided you meet the conditions of the agreement.
Not to be confused with a rental security deposit, a non refundable option fee is paid at the beginning of the lease period. Whether or not you decide to purchase the property. In the case of a rent to own agreement, the option fee will be applied toward the purchase price of the home.
At minimum, 3 to 5 % of the agreed-upon purchase price is a customary option fee but could be higher depending on demand and interest of a particular property. The more you are willing to put down, the more attractive your offer will be to the seller. In addition, the more you put down as an option fee, the less you'll need to have financed somewhere else as the terms of your lease are about to expire.
Some rent to own agreements contain a provision that puts a portion of the monthly rent payment aside as a credit toward the eventual purchase of the home.The amount varies by situation, but is negotiated prior to signing the lease to own agreement. The obvious advantage to the tenant is that they begin building equity as they rent.
Though better credit scores can influence the seller if they must choose the most qualified tenant buyer, qualifying for a Rent to Own program in general is more about your ability to make the monthly payments and the ability to repair the home than having stellar credit. The period of the lease gives you time to make repairs to your credit and to the home.
Before entering into any kind of contract you should speak with a loan officer, tell them your situation and allow them to give you a realistic view of where you will be in 2 years. Join a reputable credit repair program to get your finances in order. Finally, be responsible for your credit during your rent to own term and immediately begin working on your credit, debt to income ration, and know exactly what type of loan you need to qualify for. (FHA, USDA, Conventional, etc)