What is Rent-To-Own and How Does It Work?

If you're eager to settle down in your own place but struggle to secure a mortgage, don't lose hope. Rent-to-own might be the solution you've been looking for! It's a unique path toward homeownership that may work for you. If you’re curious to know more, our ultimate guide will walk you through exactly what rent-to-own entails, how it works, and most importantly, whether it's the right fit for you.

What is Rent-To-Own?

The rent-to-own option for purchasing a home essentially allows you to rent a home from the owner with the goal of eventually buying it from them. As you make monthly payments, a portion is set aside by the homeowner as a down payment, making it easier for you to purchase the home when the lease period is up. It's a great option for those who may not have enough savings for a traditional down payment or want to "test drive" a home before committing to it.

Pros and Cons of Rent-To-Own

Rent-to-own can be a good option in certain circumstances. It also comes with its drawbacks. Let’s take a look at some of the pros and cons.

Rent-To-Own Pros

Rent-to-own is a good option because it means you:

• Can build up a down payment over time.

• Can lock in your purchase price so it won’t go up by the time your lease expires.

• Have time to build up a good credit rating if yours isn’t great.

• May be able to stay in the area, or even the rental, you live in.

• Can make any improvements you want to the home.

Rent-To-Own Cons

With rent-to-own, the downsides to consider are that you:

• Will likely have to put down a non-refundable upfront fee (typically 1% of the purchase price).

• Will lose the down payment you’ve built up during your rental period if you don’t buy.

• Will pay a higher monthly rent (up to 10% to 15% higher than market rates) because it will include your rent and your down payment.

• May be responsible for property maintenance as a renter.

• May still not qualify for a mortgage at the end of your lease. 

How to Rent-To-Own

The process for rent-to-own is usually straightforward. These steps are the most likely:

1. You'll sign a lease agreement that gives you the choice of whether to buy the property or not. If you change your mind or don't qualify for a mortgage, you can walk away at the end of your lease. But keep in mind, you'll lose the upfront fee and money put towards your down payment. On the other hand, if your lease requires you to buy, you need to be sure you can make payments when the lease ends. It's always best to get pre-approved for a mortgage before committing.

1. You and your landlord will agree on a purchase price. And although it's recommended to work with a real estate agent for negotiations, they won't actually get a cut until the lease is up and the sale goes through. So be sure to do your homework and research comparable home prices in your area to ensure you are getting a fair deal. That way, you can be on your way to achieving that dream of homeownership in no time.

1. You'll need to pay a one-time option fee to the landlord, typically around 1% of the purchase price. While this fee is non-refundable, it gives you the exciting opportunity to buy the house at the end of your lease.

1. Next up, it's important to determine the length of your rental term – usually lasting from one to three years – to make sure you have enough time to get your finances in order.

1. Determine who's responsible for maintenance and repairs. Put everything in writing so everyone knows their role and you can live stress-free knowing that everything is taken care of.

1. Determine the monthly payment that is enough to cover your rent and go towards your down payment. In most cases, 25% to 30% of your monthly payment goes toward your down payment.

1. Apply for a mortgage near the end of your lease. Be sure to shop around and find the best lender and mortgage type for your situation.

How to Find a Rent-To-Own Home

These types of properties aren't as common as your regular home sales, but there are a few situations where you might come across them. Maybe the property has been sitting on the market for a while and the owner decides to try a rent-to-own approach. Or, perhaps a landlord wants to sell their property but the tenant isn't ready to say goodbye, so they work out a rent-to-own agreement. Lastly, a savvy homebuyer might approach a seller about the possibility of a rent-to-own option.

At times, finding a rent-to-own property can be like searching for a needle in a haystack. But don't give up hope. Keep your eyes and ears open because you never know when a rent-to-own opportunity might just fall into your lap. Happy house hunting, my friends! 

If you’re fed up with the rental grind and looking for your perfect home sweet home, look no further than Centex Homes. We've got a range of fantastically affordable new construction options that'll tick all the boxes on your wish list. If you don't want to settle for rent-to-own, explore one of Centex’s affordable new home communities today to discover stunning designs with flexible floor plans that enable you to hunt for a new home with confidence.