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Chapter 5: Figuring out a Budget for Rent to Own Homes

Budgeting is exceptionally important in all areas of finance, and this holds true when purchasing rent to own homes. In fact, effective budgeting can mean the difference between succeeding and failing when making this kind of an offer on a home. The following steps offer helpful insight to help homebuyers figure out a budget when deciding to purchase a lease option home.

FHA guidelines say that buyes of rent-to-own homes should not exceed 29 percent of their earnings for their mortgage payment.

Step 1: How Big a Home?

Buyers ought to evaluate just how much home they can actually afford. They will likely have to qualify for a mortgage when it comes time to purchase the home. Based on FHA guidelines, the residence they purchase must not exceed 29 percent of their earnings. Other things to consider are private mortgage insurance, homeowner’s insurance, basic rent payments and even homeowner’s association fees.

Step 2: Understanding the Market

Homebuyers need to investigate present-day rent to own homes in their local areas. Flyers, websites, real estate agents and even property management firms could help them discover rent to own homes that they can afford. offers helpful search engines for homebuyers looking for lease option homes in their area, allowing buyers to search by state, county, city and more. While looking at properties, prospective buyers should ask to have the utilities turned on so that they can see potential problems with the property.

Step 3: Review the Contract

Buyers must also get detailed information about the rent to own homes contract that they will be entering into. Learning more is important, since the contract may be established in several different ways.

  1. First, the seller may require a down payment from prospective buyers at the start of the contract.

  2. Second, the seller could also charge renters a fixed, monthly amount over the specific rental amount. If the seller does charge a renter extra, this amount is set aside so the renter can use it towards the down payment on the home when they make the final purchase. Finally, the seller could use both the down payment and the extra rental amount within a lease option contract.

Step 4: Considering the Risks

Comprehending the risk that comes with lease option homes is also part of the budgeting picture. If the deal falls through, the renter loses all the money put into the home. For instance, the seller could end up having to file bankruptcy or could sell the home to someone else. A seller could lose ownership of the residence by way of a foreclosure, or takes out a 2nd mortgage on the residence. In any of these situations, the homebuyer may not be able to purchase the home, which means their investment in that home could be lost.

Step 5: Inspecting the Property

A potential homebuyer must check the home he wants to rent for an eventual purchase very carefully. Obtaining an inspection of the residence via a 3rd party inspector is an excellent idea. For example, potential homebuyers should look out for peeling exterior paint, extensive roof or water damage, or drainage problems on the outside of the property. Inside the home, buyers should look for badly patched walls, cracks, damage from water and mold and pest problems.

Step 6: Timeframes and Fees

The renter must also inspect the contract and read the fine print before deciding on a budget and making the investment in the home. Buyers need to determine when the property title will be given to the renter. Every timeframe and every fee should be checked carefully as well.

Step 7: Paying the Funds

Finally, the prospective homebuyer should pay off any necessary funds at the signing. Usually, this will include the 1st month of rent and the initial down payment. Some sellers may just insist on certified funds, but after successful payment, the prospective homebuyer ought to receive the keys to the house.

At a Glance:

  • Buyers should evaluate how much home they can actually afford;
  • Prospective homebuyers should consider all rent to own homes options in their area;
  • Buyers must obtain detailed information on the contract into which they are entering;
  • Be familiar with the risk involved with rent to own homes;
  • Prospective buyers should inspect the inside and outside of their property;
  • Inspecting the contract is important;
  • Buyers should pay off due funds at the time of signing

Next: Where to find rent-to-own homes