How Rent-to-Own Homes Work

Estimated reading time: 5 minutes

Rent-to-own homes are an attractive option for people who want to become homeowners but don’t meet the requirements to get a traditional mortgage. The process has its pros and cons, but by asking key questions and assessing your situation, you can tell if it’s the right move for you. Get ready to take the first step towards homeownership.

TL;DR:

• Article explains the rent-to-own home process.
• Rent-to-own allows you to rent a home with an option to buy it later.
• Pros:
  • Test out the house and area before fully committing.
  • Portion of rent may count towards down payment.
  • Can improve credit score.
• Cons:
  • Might pay extra non-refundable rent.
  • Might be obligated to buy the house, even if its value has decreased.
• Important to thoroughly understand all terms, costs, and responsibilities before signing a contract.
• Provides a step-by-step guide for purchasing a rent-to-own home:
  • Work with a real estate agent.
  • Negotiate terms and sign agreement.
  • Make regular rent-to-own payments.
  • Decide whether to apply for a mortgage or not at the end of the lease.
• Concludes that with careful planning and understanding, rent-to-own can be a valuable path to homeownership.

What is a Rent-to-Own Home?

A rent-to-own home is a type of housing arrangement in which a tenant pays rent and also has the option to purchase the property in the future. This arrangement can benefit both landlords and tenants. It allows the tenant to secure a place to live while making payments towards owning the home and boosting their credit score, and homeowners get the security of having a reliable tenant and the chance to make a profit on the sale of the property.

The terms of a rent-to-own agreement are usually negotiated between the landlord and the tenant before the lease is signed. The agreement will typically include the length of the lease, the amount of rent, and the terms of the option to purchase the property. The landlord may also require the tenant to handle some of the repairs and maintenance that may arise.

At the end of the lease, the tenant has the option to purchase the property—unless the contract requires them to do so. Whether they’re buying the home by choice or contract, the tenant will start the usual process for applying for a mortgage and buying a home.

Pros & Cons of Rent-to-Own

Rent-to-own homes have become a popular option for potential homeowners. It’s important to consider both the pros and cons before deciding if this option is right for you.

Pros

Renting-to-own offers many advantages, such as securing a fixed purchase price and working towards a down payment. Tenants also have the opportunity to try out the home before committing to it, which can help make sure it suits their needs. If it’s a newer build, they’ll also have the chance to make the home their own. Additionally, a portion of the tenant’s rent can often go toward reducing the amount of money needed for a down payment. 

Cons

Although rent-to-own offers many advantages, it also comes with some potential drawbacks. The renter must pay a rent premium, which is an additional fee on top of the market rent rate for the property. This fee is often non-refundable, so even if the renter doesn’t purchase the property, the money is lost. Plus, depending on the contract, tenants may be required to buy the house at the end of the lease, and there’s the chance it’s lost value or they’re not able to qualify for a loan.

Questions to Ask Before Signing the Contract

When considering a rent-to-own home, it’s important to ask a few questions before signing the contract. Most of these relate to the details of renting the property, from the term to what costs are associated with it. For example, what fees will be required upfront? These can include application fees, processing fees, and option money to secure the property. 

You’ll also want to account for the ongoing costs of being a tenant, from the monthly rent to any additional fees. Make sure to ask whether utilities, taxes, and insurance are included in the monthly rent. Note any other costs, such as closing costs, that may be associated with the rent-to-own agreement. 

The final set of questions will relate to the eventual purchase of the home, starting with its price. You should also find out if there’s an early termination fee if you decide to end the lease early.

Answering these questions can help avoid any misunderstandings before signing the contract.

How to Buy a Rent-to-Own Home

Once you have done your research and asked the necessary questions, you are ready to purchase a rent-to-own home. It’s recommended that you work with a real estate agent to help you through the process, which includes:

1. Deciding on the purchase price. You and the homeowner will negotiate to come up with the home’s purchase price.
2. Signing the lease-purchase agreement and paying the option fee. This agreement should clearly spell out the terms and conditions of your rent-to-own arrangement. The option fee is usually 2–7% of the agreed-upon purchase price.
3. Moving in and beginning to make monthly rent-to-own payments. This payment usually includes an additional amount that will go toward the purchase of the home.
4. Deciding what to do at the end of the agreement. At that point, you’ll either apply for a mortgage or decide not to buy the home.

After you have followed these steps, you will be a rent-to-own homeowner! It’s important to remember to review your lease-purchase agreement periodically to make sure the terms are still favorable to you.

Are You Ready to Rent-to-Own?

Rent-to-own homes can be a great option for those who don’t have the immediate ability to purchase a home, but it’s important to ask the right questions and carefully review the contract before signing. With a little research and planning, a rent-to-own home could be a great way to get into home ownership.