If you want to buy a home but can’t qualify for a mortgage, renting a house with a purchase option might be a good solution. With a rent-to-own agreement, you lease a home with the intention of buying it at the end of a set amount of time.
Rent-to-own agreements differ among landlord and tenants. Find out what those differences are, whether you’re a good candidate for this type of investment or if you’re better off renting than owning.
How Does Rent-to-Own Work?
A rent-to-own contract typically consists of a lease option or a lease purchase. One of these leasing options gives you a choice at the end to buy the house and the other option obligates you to buy it. Essentially, you’re saving for your house while you’re renting.
By signing a lease purchase agreement you’re agreeing to purchase the home — and if you break the agreement, you’ll lose any equity you’ve accrued. A flexible contract — or one with a purchase option — enables you to change your mind and not buy the house; however, you’ll lose your deposit and any rent money you paid.
You won’t get the deed to the house until the end of the rent-to-own process. You’ll pay rent for a specific amount of time and a portion of your monthly payments will go toward the purchase price. You’ll also typically pay an option fee that’s between 2.50 percent and 7 percent of the purchase price. The fee isn’t refundable — think of it more like a long-term deposit that you’ll get credited back when you buy the home.
How to Find a Rent-to-Own Home
If you find someone who had a home on the market that didn’t sell, they might be open to the rent-to-own process. That said, you might find it difficult to find someone who’s willing to offer a rent-to-own agreement where you want to live. Rent-to-own agreements are more common in transitional areas and less desirable locations.
Entering a Rent-to-Own Agreement
You and the landlord must agree on several things before you sign a contract. Here are questions you need to ask yourself before you jump into an agreement:
- How long will the rental period be before you have to exercise the purchase option?
- Will you determine a purchase price up front or when the lease ends?
- How much will the option fee be?
- How much will the rental payment be?
- Who will be responsible for maintenance and home repairs?
The best way to decide if a rent-to-own situation works for you is to carefully review the pros and cons of rent-to-own homes, and determine whether a lease purchase agreement makes the most sense to move you to homeowner status.
Pros of Rent-to-Own Homes
Potential buyers ask, “Is rent-to-own worth it?” Although renting to own might not be the best option for everyone, it has certain advantages:
- If you can’t get a mortgage because your credit is shaky or you don’t have enough financial history, you can still achieve homeownership. Landlords are less picky than banks about credit because they don’t face the same risks.
- Leasing options give you valuable homeowner experience. Because you’ll likely be expected to maintain the home, you’ll get a preview of the work and cost involved in owning a house without making a commitment to buy.
- If you lock in the price for your purchase option and the home’s value increases while you’re still renting, you’ll benefit from the increase.
Cons of Rent-to-Own Homes
Like everything else, the rent-to-own process has downsides. See if one of these is a deal-breaker for you:
- You need to find a landlord who’s willing to give you a rent-to-own agreement, which might be tough in the location you want.
- Rent-to-own contracts generally name the tenant as the person who must maintain the home’s upkeep, which requires a financial commitment — and represents a potential loss if you opt not to buy the home.
- Your landlord might not report your rent payments to the credit bureaus so your timely payments won’t boost your credit rating.
Once you’ve considered the pros and cons of rent-to-own homes — for sellers and buyers — you can make an educated decision if this type of situation works for you. Because there is no standard rent-to-own contract, make sure you negotiate the best terms when you and your landlord draw one up.