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

If you are in a place where you are ready to buy a home, but you may not yet qualify for a mortgage, rent-to-own might be an option. If you have been wondering how to rent to own and whether it is right for you, we’ve got you covered. Here, we will outline what rent-to-own is, how it works, and whether it is something that will work for you.

 

What Is Rent-To-Own?

Rent-to-own means that you are renting a home form the homeowner with the intention of buying that home from them at some point in the future. The lease you set up with the homeowner will include an option to buy or a requirement to buy when the lease period is up. Then you will make your monthly payments to the homeowner, part of which is your rent and part of which is set aside by the homeowner as a down payment.

 

Pros and Cons to 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 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 build up equity in the home 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 on 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 will sign a lease agreement with an option to purchase or with the requirement to purchase. When you have the option to purchase, you can walk away from the deal at the end of your lease if you change your mind or don’t qualify for a mortgage. However, you will lose the upfront fee and any money you have paid into your down payment. With a requirement to buy, you must be sure you will be able to do so when the lease is up. Getting pre-approved for a mortgage is the best thing to do.

  2. Set a purchase price, which is agreed on by you and your landlord. It is common for renters in this situation to have a real estate agent help them negotiate a price, but they won’t get involved in the sale because they won’t make any money until the lease is up and the sale goes through. Do your homework on what a comparable home sells for in your area before negotiating the price.

  3. Pay an option fee to the landlord, which is typically 1% of the purchase price. This is a one-time fee that is non-refundable and gives you the option to buy at the end of the lease.

  4. Determine the length of the rental term, ensuring you have enough time to improve your financial health to finance your home. It is common for these terms to last from one to three years.

  5. Determine who has what responsibilities when it comes to maintenance and repairs. It is important to lay these obligations out in detail, so everyone knows their role.

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

  7. 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

Rent-to-own properties are not as common as regular home sales. There are typically only three situations in which you will find a rent-to-own:

 

  • The property has been on the market for a long time and the owner decides to relist as a rent-to-own.
  • A landlord decides to sell their property and the tenant doesn’t want to move, so they make up a rent-to-own agreement.
  • A homebuyer approaches a homeowner whose home has been on the market for a while and asks about a rent-to-own option.

 

In the current real estate market, rent-to-own properties are scarce because it is a seller’s market and there is a shortage of inventory. However, keep your eyes peeled for opportunities because you never know when one might come up.

 

Contact one of our knowledgeable team members today to find out more about home financing and how much house you can afford.

 

 

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Published 03.XX.22

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