Buying a house isn’t always within reach. Maybe you don’t have the cash set aside for a down payment, or you don’t have the credit history to qualify for a mortgage. If you have your sights on owning your own home in Texas anyway, you have some options, including a rent-to-own contract. Also known as a lease-option contract, these rent-to-own scenarios create a pathway to homeownership that you might not otherwise have.
In a rent-to-own agreement, you agree to rent a home for a specific length of time, and you have the option to buy the same home before the lease on it expires. Some contracts may require you to buy the house before the lease is up, and sometimes a percentage of your rent is put toward the cost of the house.
So how does rent-to-own work in Texas? Is rent-to-own even a good option? Let’s take a look at the pros and cons of rent-to-own homes and frequently asked questions about rent-to-own contracts in Texas.
Is It Legal to Rent-to-Own in Texas?
Yes, rent-to-own agreements are legal in Texas. They are typically made between the homeowner and the renter, who agrees to lease the home for approximately one to three years. The rent-to-own contract in Texas states and locks in the purchase price of the home. The renter pays an upfront fee called an option fee, which can be applied to the down payment when the renter is ready to buy the home.
Sometimes, the renter will pay a higher monthly rent, with a portion set aside for a down payment. The contract stipulates that the renter will buy the home on or before the date the lease expires. Some contracts provide the option for purchase, and others require it.
Is Rent-to-Own a Good Option?
There are several advantages to rent-to-own contracts. The biggest is an opportunity to build credit and save up for a down payment, without having to wait to move into a new home. While you’re preparing financially for homeownership, you can choose the house you want to own and commit to it. You can see the option fee and higher rent as an additional means of setting aside money that will be put toward purchasing your home.
Problems may arise if you still aren’t financially prepared to purchase the house when your lease has ended. Usually this means you’ll lose the option fee and any rent money that has been set aside for a down payment. Another problem to consider is changes in the market—if interest rates go down or the value of your home decreases during the lease period, you may end up paying more in interest than market rates or more than your house is worth.
How Much Money Do You Have to Put Down On a Rent-to-Own Home?
Typically, a rent-to-own agreement includes a nonrefundable, upfront fee known as the option fee. This is a fee that gives you the option to buy the home in the future. It’s typically put toward a down payment on the house and not returned if you back out of buying. While there is no standard rate for option fees, it will usually be between 1 percent and 5 percent of the purchase price. This fee may be negotiable.
Who Pays the Taxes On a Rent-to-Own Home?
Until the property is closed on, the current homeowner is legally liable for all property taxes. The owner is also responsible for HOA fees and homeowner’s insurance costs. Of course, as with any landlord situation, these costs are almost certainly passed down to the renter through their monthly rent payments. Typically, depending on the contract, the owner pays for repairs and renovations to the home.
How Do You Calculate Rent-to-Own Payments?
There are several payments involved in rent-to-own contracts:
- Option fee: This is the fee paid when a renter enters into the contract that gives them the right to buy the home when the lease is up. This fee is typically anywhere from 1 to 5 percent of the agreed-upon purchase price of the house. So if the house you want to buy is $85,000 and the option fee is 3 percent, you’ll pay 85,000 x 0.03: $2,550.
- Monthly rent: Usually, monthly rent on a rent-to-own home includes a portion that is set aside to cover the purchase of the home. This could mean that the payments on a rent-to-own are higher than for a typical rental. The cost of monthly rent and the percentage credited toward the purchase are stipulated on the contract. As an example, you might pay $1,000 per month in rent, with 25% put toward the home. In this case you’ll gain $250 in equity in the home each month. With a three-year lease, you’ll put $9,000 toward your house ($250 x 36 months).
- Home purchase price: The purchase price of the home is calculated based on current market rates. Just as with a home purchase, you have some room for negotiation on the final price of the home. But once the contract has been signed, this price is locked in, no matter what happens in the housing market over the length of your lease.
Make sure you understand the payments you’ll be responsible for before signing a contract, and make sure you have room in your budget to pay them and to save up for the purchase price.
How Long Are Rent-to-Own Contracts?
The length of a rent-to-own contract is determined by the homeowner and the renter. Most contracts last between one and five years. By the end of this agreed-upon time, the renter has the option to purchase the home.
Can You Back Out of a Rent-to-Own?
It depends on your contract. Some rent-to-own contracts require purchase at the end of the lease, while others give you the option to purchase without requiring it, meaning you can simply walk away with no strings attached. As with any lease, you may face legal and financial penalties for backing out before the lease is up.
If you want to back out of rent-to-own or aren’t ready to purchase the home when the lease is up, you may be able to work something out with the owner, though they aren’t legally required to make adjustments not included in the contract.
Can a Landlord Break a Rent-to-Own Contract?
A landlord is legally bound to a contract, just as renters are. That means they cannot break the contract without facing legal penalties. Some contracts may stipulate reasons why a landlord may break the contract, including if the renter isn’t able to make monthly payments or keep up the home.
Pros and Cons of Rent-to-Own Homes
Is rent-to-own a good option for you? Consider your individual financial situation. Understand how rent-to-own works in Texas, and do your research on both the housing market and the homeowner. Understand the payments you’ll be required to make, when they are due, and the details of your contract. It may be worth hiring a lawyer to look over your rent-to-own contract before signing it.
Look at your own situation and determine whether rent-to-own is a good option for your financial future. If you need a short-term loan to get cash now, Power Finance Texas can help.