As a renter, you might be familiar with the term “rent-to-own” as it relates to furniture, appliances, and automobiles. Say you need a new computer, but can’t afford to pay the full price at the moment; you have the option to rent a new computer from a lender with the inherent understanding that each rental payment moves you closer to outright owning your computer. Once the rental term is over, that computer is all yours, free and clear.
Rent-to-own isn’t just for appliances or furniture. You can rent-to-own a home through different property management companies and financial institutions in the same way.
Rent-to-own homes are also known as “lease-to-own” or a lease purchase agreement. Basically, you sign a lease with a homeowner, akin to renting from a landlord or property manager. In addition to the lease, you will also sign a purchase agreement or rent-to-own agreement. This means that a portion of your monthly rent payments will go towards future ownership of your home, which is considered a premium payment. At the end of your lease term, you have the option to purchase your home, potentially using the premiums from paying rent as a down payment.
Deciding to transition from renting to buying your home is a big step, so make sure that you are equipped with all of the information before you identify what is best for you. If you’re looking for a house or condo to stay in for a long time, but you have low credit or a down payment is out of financial reach, rent-to-own could be a great decision.
You don’t have to qualify for a mortgage or have a down payment in order to rent-to-own! Down payments for homeownership run from 3.5% to 20% of a home’s sale price. If you’re looking at a $200,000 home, you would have to have between $7,000 and $40,000 for a down payment.
Since rent-to-own provides protection from market forces, it gives more time to save a down payment and build equity without the added worry of home values skyrocketing.
Your purchase agreement locks in the price of your home at its current value, meaning that if the real estate market suddenly explodes and drives up your home value, you are unaffected because the purchase price of the home stays the same as the day you signed your purchase agreement.
There are also many upfront fees when purchasing a home such as real estate attorneys, property taxes, real estate agents, credit reports, and home inspections, not to mention high interest rates on certain home loans. Rent-to-own helps to circumvent some of these upfront costs.
In a rent-to-own situation, you will be paying both rent and monthly premiums. This means that the monthly cost of living could be much higher than if you were living in a traditional rental situation.
Monthly premiums are not like security deposits that are returned at the end of your rental lease. So if you do not wind up purchasing the home at the end of your lease period, all of those monthly premiums were paid for naught.
Furthermore, these premiums might not be included if you choose to report rent payments via services like Rental Kharma that require landlord involvement or even tenant-led rent reporters like PayYourRent.
Another thing to keep in mind is how much money you’ll need to put into your future home. If the house you’re considering needs a lot of improvements, it may not be worth the costlier commitment of a rent-to-own.
It’s important to be aware of your credit score before you start the process.
You can obtain your credit score from different companies such as annualcreditreport.com or credit bureaus (also known as reporting agencies) such as Transunion, Experian, and Equifax, as well as additional credit reporting services through some credit card companies.
Having good credit or finding ways to improve your credit score and building credit history will help you have a solid foundation when you are ready to transition into your next home adventure.
In short, we recommend that you only proceed with rent-to-own if you are absolutely certain that you can honor the terms. If by the end of your rental term, you feel that you won’t be able to save up for a down payment, or worry that the price of your home might plummet, it might not be for you. Talk to a real estate agent about whether or not renting to own is right for you.