Buying A House: Is Rent To Own Right For You?

Is rent to own right for everyone, though? We’ll discuss when you should use this specific homebuying route.

The Basics Of Rent-To-Own Homebuying Agreements

Rent to own mixes renting with buying, which is excellent news if you’re stuck between both options. In a rent-to-own agreement, you get to rent a home for a few years. Once your lease is complete, you have the option to buy it, so you don’t have to move, and you can transition from becoming a renter to a homeowner.

Such an agreement may seem ideal to you if you want to stop renting and throwing away your hard-earned money on rent each month. But it may also sound great if you want to become a homeowner, but can’t because you don’t have enough money saved for a down payment, and you’re finding it hard to get approved for a mortgage.

If you enter a rent-to-own agreement, it typically means you’ll pay a monthly rent that exceeds the property’s fair market value. This premium or excess will be put towards the eventual down payment on the home when you decide to buy it once your lease is complete. Beyond that, you may also have to fork over extra cash for an option fee. This fee allows you to buy the home at a later date, may be used towards the down payment, and often equals 1-7 percent of the home’s value.

If this sounds good so far, know that there are some risks with rent-to-own agreements. The primary risk is that you may not want to buy the home once your lease is up. In this case, you would lose that excess you paid for the eventual down payment. And if you paid an option fee, you would also lose that.

Another risk of rent-to-own agreements is the possibility of not getting approved for a mortgage once it’s time to buy the home. If this happens, you could not only lose your down payment cash and whatever you paid for the option fee, but you could also lose your spot in the home, as the landlord could rent or sell it to another person.

Is A Rent-To-Own Agreement Right For You?

Rent-to-own homes work for potential homebuyers with the following characteristics:

• You want to buy a home right now, but can’t because you lack cash for a down payment or you need to improve your credit score before applying for a mortgage.
• You know that you have issues saving money, and a rent-to-own agreement will somewhat “force” you to put cash away towards a down payment via the premium you’ll spend on rent each month.
• You have zero doubt that the home you may lease is where you want to stay because you love the location, neighborhood, schools, etc.

If the following apply, then a rent-to-own agreement may not be the right fit for you:

• You have no idea how to raise your credit score and don’t plan to either.
• You have a history of late rent payments. Missing payments in a rent-to-own agreement could lead to forfeiture of your down payment credit.
• You’re not sold on the home’s location or the property itself.
• You doubt your ability to get a mortgage once the lease ends and it’s time to buy the house.