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What is the difference between rent-to-own agreements and contract-for-deed agreements?

Becoming a homeowner is a big step to take, and it is important to ensure that one has the resources to do so. Not every consumer is going to qualify for a traditional mortgage, but there are alternative arrangements that can make it possible for those with substandard credit to eventually buy a home. One possibility is rent-to-own agreements.

Rent-to-own agreements do have the advantage of putting home-ownership within the reach of those who do not qualify for a traditional mortgage, but caution should be exercised in going forward with these deals. Somewhat similar to rent-to-own agreements are contract-for-deed agreements. The main difference between these two types of agreements has to do with financing. 

In a typical rent-to-own agreement, the purchase--if it occurs--is ultimately financed by a third-party mortgage company, whereas a contract for deed transaction is financed by the seller. The benefit to the seller in a contract for deed agreement is that the process is usually quicker than it would be if a third-party lender was involved. For the buyer, it can mean more time to improve his or her credit score and consider other financing options.

Buyers should be aware of certain aspects of contract for deed agreements, though, such as the fact that they are typically higher costs than with a traditional mortgage. A buyer may also face higher mortgage rates by the time he or she becomes eligible for a traditional mortgage. A There can also be issues if a party wants to cancel the agreement. 

Those who are contemplating a rent-to-own contract, or who are involved in a dispute with a landlord over such an agreement, should work with an experienced real estate attorney. Doing so ensures that the consumer's legal rights and financial interests are well represented in negotiations and, if necessary, in court should a dispute arise.

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