Are Rent-to-Own Homes Safe Alternatives to Traditional Mortgage Loans?

Posted in Mortgage Rates • July 8, 2014

rent-to-own homes

Are you looking to purchase your own home, but are not sure where to start? If you’ve heard about rent-to-own homes but have some questions, we devised this simple and effective guide on everything you need to know about rent-to-own homes, including how to find rent-to-own homes, the process of signing onto a rent-to-own home, pros and cons of rent-to-own homes, and the difference between this option and a conventional mortgage loan.

Conventional Mortgages Versus Rent-to-Own Homes

A major difference between a home purchased with a conventional mortgage loan and a rent-to-own home is that traditional mortgages require homeowners to have very good credit to qualify, and even better credit to get the best mortgage loan rate. With the rent-to-own home option, it usually isn’t a problem if the applicant has poor or no credit  — he simply needs to have a down payment on hand and be able to make monthly rental payments.

Additionally, while traditional mortgage payments are guaranteed to go toward the ultimate ownership of the house, payments with rent-to-own home arrangements are not always guaranteed to go toward ownership and, in some cases, are lost forever.

Pros and Cons of Rent-to-Own Homes

If you are thinking about diving into a rent-to-own home, it is wise to first understand some pros and cons before making such a big financial investment. According to Zillow, there are several benefits to taking the rent-to-own approach to homeownership:

Pros of Rent-to-Own Homes

  • Opportunity for people with no or poor credit. If you are looking for a starter home and don’t have any credit or you have fallen on hard financial times and have missed paying some bills that have negatively impacted your credit, a rent-to-own home can permit you to develop equity and let your credit heal before applying for a mortgage.
  • You are in control of your home-buying destiny. With a rent-to-own contract you have the option to build equity in your potential future home or you can choose to walk away from a home if you don’t want to purchase it.
  • You are preparing yourself for home ownership. Going with a rent-to-own home prepares you to take the next step and become a homeowner. You are able to understand what it really means to become a homeowner without actually “owning” a home.

However, despite these attractive benefits, there are a few serious risks and potential drawbacks to renting with the option to buy:

Cons of Rent-to-Own Homes

  • If you decide to rent only, you forfeit all of your payments. If you decide to not go ahead with a full purchase of the home you are renting, you forfeit all of the money you paid in rent and for the premium option fee.
  • You could fall victim to a poor contract or one of many rent-to-own scams. If you do not have a professional representing you (a broker or lawyer), consider hiring one. At the very least, make sure you understand the terms of your agreement very well, as your rent-to-own contract might not permit late rent payments to apply toward your eventual purchase.
  • Various factors could end your agreement. Some contracts enable the seller to end the agreement or one or more clauses of it; maintenance, payment due dates or the ability of the seller to find a more attractive buyer are all factors that could end your agreement.

How to Find Rent-to-Own Homes

If you want to learn how to find rent-to-own homes,  the San Francisco Chronicle suggests a few places you can start looking to find homes like these:

  1. Craigslist. Along with homes for sale and apartments for rent, there will be a good number of rent-to-own homes for sale throughout each major geographic listing.
  2. Search engines and specialized websites. By simply using the keyword phrase “how to find rent-to-own homes” in search engines, you can find local and national rent-to-own websites with listings. The San Francisco Chronicle’s recommendations of national sites include Lease2Buy.com, USLeaseOption.com and iRenttoOwn.com.
  3. Local real estate publications or newspapers. Check local publications as well to increase your chances of finding rent-to-own homes in and around your neighborhood.

Signing the Rent-to-Own Contract

The process of signing on for a rent-to-own home is similar to purchasing a home with a consumer-based mortgage loan. Instead of a home being put up for sale, however, it is put up on a rent-t0-own basis.

Most rent-to-own contracts are for terms of one to three years, and include an upfront deposit to guarantee the purchase price, should the renter and owner agree to a sale at the end of the contract.

The upfront fee and the monthly rental payments during the contract can be combined and put toward a home down payment on the contractually-specified purchase price. During the term of the contract, renters can work on their credit and improve their financial situations so they can obtain loans to purchase their homes.

However, if financing cannot be secured by the renters during the rental phase, the deposit and rent payments will be forfeited to the seller.

Photo credit: Håkan Dahlström

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