How Do Rent-to-Own Homes Work?
Becoming a homeowner is a goal for many — but soaring home prices may make it feel out of reach. A rent-to-own agreement, as the name suggests, allows you to rent a home with the option to buy it at a later date. Rent-to-own deals are complicated, though, so it’s important to understand the benefits and risks before choosing this path.
- Rent-to-own properties allow you to start the homeownership process, even if you don’t qualify for a traditional mortgage.
- At the end of the rent-to-own contract, you’ll have the option to buy the home you’re renting if you’re financially ready to do so.
- Some rent-to-own agreements legally require you to purchase the property when the lease term ends, even if you’re not ready or have changed your mind.
What is a rent-to-own agreement?
Rent-to-own agreements usually charge a base monthly rent and an option fee — a one-time, nonrefundable deposit toward the home’s purchase price. Some rent-to-own house contracts allow you to apply a portion of your rent toward the purchase price, helping you build savings for your down payment.
There are two main types of rent-to-own home contracts: lease-option and lease-purchase.
- Lease-option agreements provide an opportunity for you to purchase the home once your rental lease ends. With lease-option contracts, if you aren’t financially prepared to buy or change your mind about the home, you can simply walk away.
- Lease-purchase contracts, on the other hand, legally require you to buy the home at the end of the rental agreement.
The rental period before the option to buy varies depending on the contract, but may range from one to three years.
Let’s say you enter into a three-year rent-to-own agreement. The option fee is $6,000 and the home’s purchase price is $200,000. Your base rent is $1,200, and $200 of that amount is applied to the home’s purchase price. After three years, you’ll have saved $7,200 ($200 for 36 months). Add in the $6,000 option fee, and you have $13,200 to use for a down payment. You can then apply for a regular mortgage to buy the home.
See more tips on how to save for a house.
Rent-to-own homes pros and cons
Pros
- Path to homeownership: Rent-to-own offers a path to homeownership for people who need time to get their finances in order before qualifying for a standard mortgage.
- Opportunity to “test drive” a home and neighborhood: Living in a rent-to-own home allows you to “try before you buy” to see if the home and neighborhood are the right fit for you.
- More time to repair your credit: If your credit score needs some work, moving into a rent-to-own property can provide the time you need to improve it before applying for a mortgage.
- Helps you save for a down payment: Since a portion of your monthly rent payment may go toward the home’s purchase price, it can help you build down payment savings over time.
Read our study on whether renting or owning is cheaper in the top 100 metro areas.
Cons
- Higher monthly costs: You may pay an above-market rate to live in a rent-to-own house, since your monthly payment usually includes the base rent and a portion of the purchase price.
- You could be responsible for repairs and maintenance: Depending on the terms laid out in your rent-to-own contract, you may be on the hook for home repairs and maintenance. This differs from traditional renting, where the primary responsibility is with the landlord.
- Complex terms: Rent-to-own contracts are complicated, and terms can vary depending on the program or landlord you’re working with. It’s crucial to read and understand the fine print before signing.
- You may lose money if you don’t buy: Depending on your contract terms, you may lose some or all of the money you paid toward the purchase price if you decide not to buy the home when your lease ends.
Not sure what to expect from the homebuying process? Read about how to apply for a mortgage.
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As for the home seller, whether a private owner or large rent-to-own company, the main benefits of rent-to-own include having a steady source of income and the ability to potentially charge a higher sales price. However, there’s always a possibility that the buyer could default on their rent payments, leaving the seller in a tough financial position.
How to find rent-to-own houses
- Work with a real estate agent: A local real estate agent can shed light on the process and help you find rent-to-own homes that suit your needs. Focus on finding agents that have experience helping buyers with rent-to-own transactions.
- Compare rent-to-own programs: Evaluating rent-to-own programs across a few different companies can help you find the right deal. Compare available homes, terms, fees and rental periods. Rent-to-own companies include Dream America, Divvy and Landis.
- Reach out to sellers: Private sellers may be open to rent-to-own arrangements, especially if they’ve been struggling to sell their home. Try reaching out to sellers with homes that have been on the market for at least three months.
Learn about how to negotiate a home price and why you should.
Rent-to-own contract: Questions to ask
One of the most important parts of the rent-to-own process is reviewing the contract terms and asking the right questions. Here are examples of questions to ask before signing on the dotted line:
- Am I signing a “lease-purchase” or “lease-option” contract?
- Which fees will I pay as part of our agreement?
- How much of my monthly rent payment goes toward the home’s purchase price?
- Who is responsible for covering home repairs and maintenance?
- Who is responsible for paying the property taxes?
- What happens if I miss a rent payment?
- What happens if I decide I don’t want to buy the home?
- What happens if I can’t qualify for a mortgage to buy the home?
5 tips to help you navigate the rent-to-own process
1. Read the contract terms thoroughly
You want to know what you’re getting into. Review the fine print of your rent-to-own contract and ask questions about any terms you don’t understand. Doing so can help you avoid confusion down the road.
2. Speak with a real estate lawyer
Having a real estate attorney review your rent-to-own agreement and provide guidance can help give you peace of mind before making any commitments.
3. Find out who’s responsible for maintenance costs
To avoid costly surprises, confirm whether you or the property owner will be responsible for a leaky roof, broken appliances or other repairs.
4. Avoid scams
Watch out for rent-to-own scams by taking steps to confirm the ownership and property tax status of the home, especially if you’re dealing with a private seller.
It’s wise to practice caution when it comes to rent-to-own transactions, since scams unfortunately do exist. If a deal seems too good to be true, or the owner asks for money before signing the contract, it could be a scam. Watch out for red flags and work with an experienced real estate agent to help you navigate the process safely.
5. Invest in a home appraisal and inspection
It’s a good idea to get a home inspection and appraisal — after all, the home might be yours one day. An appraisal ensures that you pay a fair purchase price, while an inspection uncovers any potential problems with the home.
Should you get a rent-to-own home?
Rent-to-own might be a good fit if you plan on buying a home in the same area that you want to rent in. They can also be helpful if you need more time to work on your credit and save for a down payment. But if you plan to relocate in the near future, a rent-to-own arrangement may not be the best option, since you’ll generally be locked into a contract for up to three years.
Rent-to-own home alternatives
FHA and VA loans
FHA loans and VA loans are government-backed mortgage programs that generally have more flexible requirements than conventional mortgages. They both usually accept lower credit scores and require smaller down payments, helping to make homeownership more accessible.
See current FHA loan rates and VA loan rates to compare top lenders today.
Down payment assistance
Check with your state to see if you’re eligible for down payment assistance, like grants or loans. Down payment assistance programs are typically reserved for first-time homebuyers, though eligibility rules vary by state.
Wait until your finances are in better shape
It can be tempting to dive into homeownership right away, but waiting can often pay off in the long run. Prioritize paying off your debt, repairing your credit and boosting your savings — steps that can help prepare you for homeownership and secure more favorable mortgage rates and terms in the future.
Get your free credit score with LendingTree Spring.
Frequently asked questions
Rent-to-own homes may be worth considering if you want to buy a home but don’t qualify for a traditional mortgage — perhaps because of your credit score, income or debt. But it’s not a decision to take lightly and it’s crucial to understand the risks.
A landlord may have the right to terminate a rent-to-own contract if you miss a rent payment or otherwise violate the terms of the agreement.
It’s possible to get a rent-to-own home with a bad credit score. Minimum credit score requirements vary by seller, and some rent-to-own companies accept credit scores as low as 500.
Though rent-to-own homes are less common than regular rentals, legitimate options do exist. It’s important to do your due diligence on any home you’re interested in and stay alert for rent-to-own scams.
The main difference between a mortgage and rent-to-own is that a mortgage allows you to immediately purchase a home. With rent-to-own homes, you start off as a renter with the option (or requirement) to later buy the home.
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