When it comes to financing your home, a mortgage continues to be the most popular way around. However, you must be aware of the stringent lending norms that most creditors have in place. If you are looking for viable alternatives, you would like to explore financing the property or leasing it to own sometime in the future.
In a nutshell, financing and leasing to own are two valuable options if you have bad credit and still want to own a home.
You might feel that both these options are similar in several ways. This article is curated to clear things up by demonstrating the differences.
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What is lease-to-own?
Under a lease-to-own agreement, the buyer reserves the option to purchase the property in the future while they keep paying the rent. As a renter, you need to live in the property and shell out the rent until you completely make the necessary payment to own it fully. The original owner would continue to be the landlord until the renter purchases the home. Also, the property deed would have the original owner’s name on it. This person would be liable to pay the mortgages if any.
As a renter, you own the right to purchase the property in the future. However, this is not an obligation, and you might decide to never own the property.
What is seller financing?
The key difference between lease to own and financing is the change of hands at the very outset. Under financing, you would become the new owner of the property. However, you need not make any sort of payment to the lender (bank) but the previous owner of the house.
As the property buyer, you have the option to make the payment in several installments. This process may last for several years, as discussed at the time of the agreement. However, the rates of interest are high, and you have the risk of losing the property and the money you had paid if you fail to pay the installments.
Lease to own vs financing: Key differences
Here are some key differences between the two forms of financing:
1. Ownership transfer
In the case of a lease-to-own deal, you need to rent the home for some time until you manage to purchase it. You might either take a loan from a creditor or accumulate adequate cash to pay for it. Only when this contract is fulfilled, the ownership transfer takes place.
However, when you go for financing, you become the property owner at the beginning. In this case, you have an obligation to pay monthly installments. Accordingly, you have to continue with the schedule until you pay the entire amount.
2. Repairs
When you settle for a lease-to-own agreement, you will continue to be a tenant until the payment for the property is completed. The responsibilities and rights associated with the ownership of a home remain with the seller. This implies that the property’s original owner would be responsible for arranging all the repairs required.
In the case of financing, you would get the ownership rights at the outset. Therefore, if any repair has to be made, you would be responsible for the same.
3. Associated risks
Since you won’t be owning the property in the case of a lease-to-own agreement, you cannot sell it off to avoid foreclosure. Therefore, if you decide not to live in the house, you need to make the complete payment at the outset and purchase the property. Once the ownership lies under your name, you can sell it off.
Moreover, you would make non-refundable deposits during financing. In case you run into a financial crunch and default with these payments, you would lose the property as well as the money.
4. Finance management
It makes sense to weigh your financial capabilities regarding leasing and financing. When you lease to own a property, you need not make any significant down payment. However, in the case of financing, you may have to make a substantial down payment. This would also reduce the burden of monthly payments significantly.
Also, the financing duration is shorter and lasts up to five years. On the other hand, a lease agreement might last up to fifteen years or even longer.
5. Security requirements
In case of financing, you would be borrowing an amount from the property’s original owner. Therefore, you need to pledge your assets as collateral or primary security. However, when it comes to leasing, you do not need to deposit any kind of security. This ensures you a greater degree of financial freedom.
Advantages of lease-to-own agreements for buyers
- If you are a property buyer with bad credit, a lease to own would be an ideal option for you. This is particularly true when the leading banks are unwilling to grant you a loan. Initially, you simply need to pay the rent. Once you work hard enough to improve your credit record, you can obtain a home loan and acquire the property.
- Even if you make the final purchase after a few years of signing the agreement, you would have to shell out the current price. With the real estate industry becoming expensive, you can have a lucrative deal.
- Before finally moving into the property, you get adequate time to determine whether it would suit your lifestyle.
Advantages of financing for buyers
- Unlike bank loans, financing does not involve a rigid legal process. Hence it works as a faster option for closing.
- It does not involve bank or appraisal fees, thus proving a cheaper option.
- You would enjoy adequate flexibility while making the down payment.
Lease to own vs finance — what have you learned?
Hopefully this article has helped you solve the debate of leasing to own vs financing. Depending on your financial strengths and goals, both financing and lease-to-own can be good options for property ownership. However, each comes with its risks, so you need to foresee them well before proceeding. It makes sense to consult the experts regarding home insurance, as it would secure you financially. Have a word with the best insurance expert team to be on the right track.