If you want to purchase your own home and finally become a homeowner but don’t yet have enough saved for a down payment, a rent-to-own purchase may be right for you.
Read on for the different rent-to-own programs in Arizona, including how to start the buying process with a rent-to-own contract. This article also covers the pros and cons of lease-to-own programs, helping you decide the best path toward becoming a homeowner.
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What are rent-to-own homes?
Rent-to-own homes are properties with a special contract that allow a tenant to work towards purchasing. In a rent-to-own agreement, the tenant makes regular monthly rent payments for a specific time period before having the option to buy.
Depending on the contract, at the end of the lease agreement, the homeowner sells the property to the renter, applying some of the collected monthly payments toward the purchase costs. Rent-to-own homes allow buyers to use a percentage of monthly rent payments to go toward a down payment on the home.
Types of Rent-to-Own Contracts
There are two rent-to-own programs in AZ to accommodate different buyers.
A lease-option agreement gives the tenant the option to purchase the house at the end of the lease. Arizona laws allow the renters to decide whether or not to purchase at the end of the lease agreement, as long as all listed conditions have been met.
If you choose not to buy the home, you may continue renting or the landlord may require that you move out. If you decide to buy the home, you’ll have to come up with the money to pay the asking price. Luckily, there are plenty of home loan options in Arizona.
A lease-purchase agreement is a legal contract that requires the tenant to purchase the home at the end of the lease for the previously agreed-upon price. Because the landlord expects the tenant to purchase at the end of a lease-purchase agreement, it’s essential that you’re able to financially qualify for a mortgage in the near future.
Renters should also complete all pre-inspection and appraisal needs before signing a lease-purchase agreement to ensure the home is worth the asking purchase price and that it doesn’t require any extensive repairs. An appraisal ensures your potential home’s value is consistent with the purchase price.
How to Get a Rent-to-Own Agreement in Arizona
Interested in rent-to-own homes in Arizona? You can expect the following steps as you turn your rent money into your dream home.
Step 1: Compare your options
Arizona homebuyers can choose lease-option or lease-purchase agreements, so it’s important to decide which option is best for you.
Understand the price of renting to own versus purchasing outright. Consider how much money you can save up during the lease period.
A lease-to-own agreement can benefit many homebuyers, but it’s important to understand the cost requirements of each option first.
Step 2: Choose a lender
Evaluate your financing options and decide how much of a mortgage you can afford. Consider how much money you’re currently paying for rent and what monthly payment you’ll be most comfortable paying.
Don’t forget to account for extra money that may not currently be a part of your renting costs. As a homeowner, you can also expect to pay money for monthly insurance, repairs, and upkeep.
Work with an agent or lender who’s familiar with the unique requirements of rent-to-own homes in the state. Working with a lender before shopping for a lease-to-own purchase also gives you an idea of how much you can afford before signing a lease agreement.
Step 3: Shop for rent-to-own homes
Consider working with an agent who can show you available rent-to-own properties in your local market. An agent can help you negotiate a fair sale price based on how much you can afford and the current Arizona real estate market.
The price you pay for a rent-to-own home in Arizona depends on many factors, including the home’s size, number of bedrooms, number of bathrooms, and market value. Make sure you choose a home you can comfortably afford.
Expanding your home search into different Arizona cities can also give you more lease-to-own home options within your price range. Work with your agent to choose a home in your preferred area.
Lease-to-own homes in Arizona cities, like Phoenix or Scottsdale, may have a higher price. If you settle outside of the metropolitan cities, your agent may help you find a cheaper price on a lease-to-own home.
Step 4: Negotiate the contract
You and your agent can negotiate a fair lease-to-own price. Important parts of the contract to negotiate include down payment, length of lease, purchase cost, and rent credit. You should also determine who is responsible for repair needs throughout the lease agreement.
It’s important to carefully evaluate your contract to ensure you understand what you need to do to purchase the home. This also ensures you save up enough money to afford the purchase at the end of the lease agreement.
Step 5: Work toward qualifying for a mortgage
Renting a home before buying gives you extra time to obtain a loan. However, time goes by quickly, meaning it’s important to begin working toward qualifying for a mortgage immediately. By now, you should already know the intended price of the home so you can begin saving up enough money to convert your lease to a purchase agreement.
You’ll want to save up enough money for a down payment, necessary repairs, and closing costs (i.e. the money you pay to originate the loan). You should also work towards improving your credit score. Lenders use credit scores to determine the financial health of an applicant. A better credit score can make it easier to get approved for the full purchase price of the home.
Pros and Cons of Rent-to-Own Homes
Considering the pros and cons of lease-to-purchase homes in Arizona can help you choose the best buying situation for your financial needs and goals.
The Advantages of Rent-to-Own Homes
Here are a few benefits of rent-to-own homes:
- They make it easier to save for a down payment. Paying a portion of your rent each month to the landlord toward a down payment can make it easier to save.
- They allow you to get a feel of the home before buying. Renting a house before you purchase allows you to get a true feel for the home’s amenities and location and decide if it’s the right fit for you.
- They allow you to benefit from tenant rights during the rental period. Arizona requires rent-to-own tenants to have the same rights as traditional renters during the rental period, in which they can’t sell the property until your option to purchase expires.
- They give the opportunity to transition to homeownership despite increasing rental prices. Arizona’s rent prices continue to fluctuate, and transitioning to a homeowner allows you to avoid the uncertainty.
The Disadvantages of Rent-to-Own Homes
Here are a few shortcomings of rent-to-own homes:
- You could lose money if you decide not to buy the home. The biggest disadvantage of rent-to-own homes is that you could lose money if you decide not to purchase the home. Most rent-to-own agreements forfeit any down payment money saved to the landlord.
- You may lose your option to buy. The sale of the home is dependent on the tenant meeting all contract requirements, including saving up a down payment and getting qualified for a mortgage by the lease end date. If you don’t meet these lease requirements, you could lose your option to purchase.
- Rent credits may be limited to a certain time period. Rent credits that go toward the down payment are typically only good for up to one year. If you need more time to save enough money for the purchase, you could lose your option to buy.
- You still have to qualify for a loan. A rent-to-own agreement still requires that you qualify for a loan. It can be helpful to contact a lender before signing an agreement to determine how likely it is that you’ll qualify for a purchase before the end of the rent period.
- You may pay a higher price for the property. Landlords typically charge tenants a fee for having the option to buy in the future. You may also have less negotiation power with rent-to-own homes since there are fewer on the market.