How Does a Rent-to-Own Home Work?

By Realty Times Published Apr 30, 2024 03:06 pm

A rent-to-own home can be a viable option for some people if maybe a mortgage isn’t right for them at this moment or wouldn’t be available to them. Rent-to-own homes can be a way to wade into homeownership less traditionally and more slowly.

What is a Rent-to-Own Home?

A rent-to-own home will have a lease. Then, with that lease, you’ll have either an option or a requirement to buy at the end of a certain period of time. The rental payments that you’re making will include not just the rent itself but also should be contributing to your future down payment. You can simultaneously build your credit score and down payment.

You could opt for this setup if you don’t have the money right now for a down payment or closing costs.

If you only rent traditionally, then you aren’t building equity.

You’re getting some benefits of renting and buying with rent-to-own homes, but with caveats that you should be aware of.

In a rent-to-own contract, you’ll probably end up paying a little more than the fair market value since that money will become your down payment when your lease ends.

You might have to pay an option fee, anywhere from 2-7% of the home’s value, to hold your option to buy it. This isn’t always required. If you didn’t buy the property when your lease is up, you would forfeit your extra payments.

What Are the Pros?

If you’re considering a rent-to-own home, there are benefits.

First, you’re giving yourself time to save money up your down payment.

You are also at the same time as you’re saving that money, getting the chance to make sure the home will work for you. Your contract will specify how much your payment goes towards your down payment. It can be like forced savings, and if you aren’t great at otherwise saving money, this is beneficial.

Another perk of rent-to-own is that most of these agreements will split the responsibility of maintenance and repairs between you as the tenant and your landlord. You might cover minor repairs and the associated costs, and your landlord could agree to handle the more extensive repairs.

At the end of the lease, you can get a home loan and move forward with your purchase. The money that was collected as a down payment goes to your lender.

You still have the flexibility not to go through with the purchase.

What About the Cons?

If you move into a rent-to-own home, you could lose money if you don’t buy. Yes, you have the flexibility to make that decision, but in doing so, you’re giving up the rent you paid and the option fee if your agreement requires it.

You might not be able to buy the home at your lease’s end if you can’t qualify for a mortgage. The owner of the house can put the home up for rent again or sell it if you aren’t able to get a loan.

Types of Contracts

There are usually two types of legal agreements you can opt for with a rent-to-own home.

One is a lease agreement that has the option to purchase. In this contract, you have the right, yet you’re not obligated to buy the home as the lease ends. Your option expires if you decide you aren’t going to go through with the purchase and you walk away, although you lose the money you paid beyond the fair market rent.

The second is a lease agreement with a purchase agreement. You might be legally required with this contract to buy the home when your lease ends. You have to be careful under this agreement that you have a home inspection done to ensure there aren’t any surprises after you become the owner.

Finally, it’s also a good idea to get a mortgage pre-approval if you’re entering into the second type of contract to make sure you’ll be able to qualify when the time comes.