Owner financing vs lease option (rent-to-own) in Houston: which one is better

If you can’t get approved for a mortgage, you can use other financing methods to buy your dream home. Two of the most popular methods of buying without a mortgage in Houston are lease option and owner financing.

Both options are explored mostly by credit-challenged home buyers, but which one you choose will have a huge deal of impact on your financial obligations and home buying experience.

Let’s discuss what makes owner financing different from lease option and which financing method is better:

Owner financing

You can read a lot of article on our website explaining how owner financing works and what its pros and cons are. Owner financing in Texas is a completely legitimate financing method that credit-challenged people can explore to buy a home.

You can obtain owner financing in a lot of different ways. You can find a seller who will owner finance a home to you. You will pay monthly installments to the seller rather than a bank.

The other method is a bit indirect. You can enlist the services of Shop Owner Finance. This way you don’t directly buy from the seller. An investor from our network buys the home of your choice and owner finances it to you. This system enables our clients to buy any home they want with owner financing. In this case, the investor acts as a lender and extends financing to you, not the seller.

Everything works the same way as it does when someone buys with a mortgage. The transfer of title will be recorded in your name with the county office. You follow certain owner financing terms that you and the investor agreed upon at the time of the transfer of the title. The investor will have the authority to repossess the property in case you default on your mortgage (like a conventional lender does when you are delinquent).

If anything happens to the investor, you will have the Deed of Trust recoded with the county office that will show that you are the rightful owner.

There are certain owner financing risks that we have discussed in this article.

Lease-option

In a lease-option deal – also known as rent-to-own, you rent a home and have the option of buying it after a certain number of years. You are required to pay the seller a certain amount of ‘option money’ up front (when the lease period begins).  

The people who can’t qualify for a mortgage, but believe their credit will improve in a few years tend to buy with lease option method.

The lease period and the amount of option money are negotiable. If you back out from the deal at the end of the lease period, the seller keeps the option money. In other words since the option money is non-refundable, you will lose it in case you decided not to buy the home.

While you don’t need a stellar credit score to buy with this method, a lot of things are left to chance. Most people using this method are distressed sellers. If the seller doesn’t pay his or her monthly installments and become delinquent during the lease period, the lender will foreclose.

Another uncertainty in a lease-option deal is that your credit score might not improve by the end of the lease period. If you fail to secure a mortgage, you won’t be able to buy the home and lose the option money.

In conclusion

Texas laws frown on lease option because there have been cases of buyer-tenants being cheated by sellers. In an owner financing arrangement, you own the home from day one.

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