Home ownership is still widely considered part of the American dream in the United States, and in other countries the ability to purchase a home is also prized. The problem is that for many first time buyers there are things that get in the way, mostly the amount of money needed for a down payment and lack of credit (and sometimes even less than perfect credit). A suitable option for many first time buyers is the lease to purchase contract, sometimes known as the purchase option in a lease.
Such contracts are perfectly legal and are in full effect wherever there is an economy based on free-market principles. This includes all 50 of the states in America, but also extends to such agreements in Great Britain, Australia, and Canada. What the lease to purchase agreement essentially does is to combine the lease agreement with an option to buy the home after the period of the lease is up. A purchase option lease is one of those agreements considered a “win/win” situation.
If you plan to take advantage of this possibility, you have smaller out of pocket expenses, a chance to prove that you can make the monthly payments, and the benefit of being able to purchase a home if you lack credit or if you have credit problems. This is an opportunity that also allows you to “test drive” the house to see if it fits your needs. The seller receives monthly rent payments and the knowledge that you are likely to buy. Even if you choose not to buy, the landlord can keep the nonrefundable deposit and find another person to sign up for the contract.
The only real downside from the renter/buyer point of view is the nonrefundable deposit that is made. However, this deposit is less than a down payment would be, and goes entirely toward the future down payment on the home, should you pick up the option to buy. Additionally, a portion of the rent the tenant pays each month goes toward paying for the house (usually a percentage agreed-upon when the agreement is made). This means that when it comes time to exercise the option, you already have a good amount of money amassed for the down payment or toward the purchase price of the house.
Most agreements set a price for the home at the outset so that the tenant is protected from price increases in the housing market and the landlord is protected from housing prices falling. The term of such agreements usually last from 2 to 5 years, although the length varies according to the desires of the parties involved. For first time homebuyers who want a faster way to build equity, and who might not otherwise be able to buy, the lease to purchase option is a viable and cost-efficient opportunity.