What is Renting to Own?

Rent-to-own is an option if you can’t qualify for a mortgage for reasons such as bad credit, or simply because you don’t have enough money saved for a down payment. This way, you can build your credit rating and put money towards a down payment before any hassle with the bank. There are agreements that must be signed by both the tenant and the landlord to get the ball rolling, including the “option to purchase agreement” and “lease agreement”.

The lease agreement outlines details like the cost of rent per month, how rent will be paid, the date of which your lease will end, and the date in which you will be legally able to take ownership of the home. The option to purchase agreement also covers details such as the date the home will be available to purchase by the tenant, as well as the final purchase price.

Now you may be thinking, how does this work? Once the agreements are signed and you move into your house, it’s basically a normal renting experience. Because you do not own the home, you may not be able to modify it like you want (such as painting the walls or doing any renovations), and each month you pay rent to your landlord. The difference of a rent-to-own experience is that before paying rent, you put down a deposit, more than a typical first-and-last month payment, and each month, only a percentage of the rent you pay goes towards your eventual down payment for the property, with the rest going to your landlord.

Getting a Mortgage on a Rent-to-Own

At the end of your lease, which is typically 3-5 years, you must find out if you qualify for a mortgage through the bank. If you don’t qualify, you lose out on the money you put towards the home. If you do qualify for a mortgage, then the home is signed over to you from the original purchaser, and you then become the proud new owner. The great part is you’ve already started building equity with the money you put towards the mortgage while you were renting. If everything goes right, it’s very easy to see why rent-to-own may be an ideal option despite the accompanying risks.

Proceed with Caution

The terms outlined in the agreements for rent-to-own options can be very complex and flexible, however in many cases, they are not designed to be in the favor of the tenant. If you are late with a rent payment even once, that could be grounds for the landlord to call off the deal. Depending on what you sign for, if there is anything the landlord deems to be in breach of the contract, you may be out of luck.

The biggest drawback of all is that just because you have signed the agreements and are paying a percentage per month towards a down payment, it doesn’t guarantee that you’ll be qualified for a mortgage once the period of the agreement ends. If you don’t qualify, you are out the money you paid during your lease agreement, including the deposit at the beginning. This is a major setback for anyone hoping to own a home, as all the funds being put towards a down payment are now gone.

This is the most significant reason why rent-to-own can be risky and why you should really explore your options if you are looking to purchase a home.

Has rent-to-own worked for homebuyers in the past? Yes. Could it work for you? Possibly. Before you decide to take the leap into a rent-to-own contract, it is important to discuss your options with professionals. See a bank to review your credit status and whether you are on the right path to qualifying for a mortgage.

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