Here's what you need to know about participating in a hire purchase program.

In today's real estate market, many buyers have difficulty buying homes for one important reason – inventory is so limited that it drives property values ​​higher. As a result, you may not be able to afford to buy a home right now, even though mortgage rates are near record lows.

If you really want to buy a home but can't swing it right away, a hire purchase program might be of interest to you. Here we discuss the pros and cons.

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This is how hire purchase works

With a hire-purchase agreement, you conclude a rental agreement for a house, which you then have to buy or buy after a certain period of time (usually up to five years, but this period can be shorter). In the meantime, your landlord – who is also your seller – will be helping you fund this home by using part of your monthly rental payments on a down payment for this property.

The benefit of hire purchase programs

A rent-to-own program could allow you to buy a home in a few years if you can't swing it now, whether it's because you don't have enough cash to pay a down payment or your credit rating isn't high enough to qualify for a mortgage. These programs are also a type of forced saving as part of your rent is set aside to eventually cover your home purchase.

Also, some lease purchase agreements don't force you to complete the purchase, so this setup gives you flexibility. If after a few years of renting your home you decide not to buy it, you can withdraw. However, some leases force you to complete your purchase or otherwise face penalties. So you need to carefully review your agreement and make sure you understand what terms you are signing up for.

The downside of hire purchase programs

With a hire purchase agreement, the monthly rent you pay is usually higher than what you would pay for a similarly sized home to rent. Of course, that extra money goes into your home down payment, so you don't just throw it away. However, if you want more flexibility in your finances, it may be better to just rent a cheap home while you save on a down payment, work on your loan, or both.

If you don't qualify for a mortgage at the end of the rental period, even if you are ready to close the deal, you will not be able to buy your home. And at that point, even if you try your best to keep your end of the bargain, you could risk a costly penalty.

Finally, you should know that with a lease purchase agreement, you must commit to a specific sale price when you enter into your contract. But if the property's value falls over the next few years, you could end up paying more than you need to.

Right now, as mentioned, real estate prices are really inflated, so if you get a three-year lease and buy a home for $ 300,000 after that period, you're stuck by that price. But a home that could sell for $ 300,000 in today's marketplace may be worth only $ 260,000 in three years, once the real estate market cools off. So this is a risk that you are going to take.

While a lease purchase agreement might be a smart choice for you, it might not make sense in today's marketplace – and it can also be very difficult to get. With a lease purchase agreement, sellers take some risk that you won't end up buying the home. And since it's currently a seller's market, they generally don't need to take that risk. However, when you do find a seller who is at stake, consider carefully your options before signing any of these contracts.

source https://seapointrealtors.com/2021/07/31/is-a-rent-to-own-property-right-for-you/

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