Ultimate Guide to Rent-to-Own Homes

Written By Marie Abendroth
Last updated April 5, 2021

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Loans
April 5, 2021

Simple. Thrifty. Living.

Although there are many excellent first-time homebuyer mortgage options, they don’t work for everybody. If you don’t have great credit or simply cannot save up fast enough for a down payment, you could have trouble getting approved.

Thankfully, you can go with a rent-to-own agreement instead and achieve your dreams of homeownership. You do need to know all the ins and outs of this type of agreement to decide if it’s right for you. So, look at this guide to explore all the details before deciding.

When you sign up for a rent-to-own agreement, you start by renting the home for a certain amount of time and then buy when the lease ends. The lease period usually spans from one to three years. This gives you time to save for a down payment and improves your ability to get approved for a mortgage.

While you sign a standard rental agreement as a part of the rent-to-own process, there’s a lot more to it than that. In addition to the lease, your agreement includes:

Lease Option or Purchase Contract

The rent-to-own agreement includes either a lease option or a purchase contract. With the lease option contract, you simply have the option to buy the home at the end of the lease. The lease-purchase contract makes it mandatory.

Since the homeowner can use either of these arrangements, read the contract carefully to see which one you’re getting. If you’re not absolutely certain that you’ll qualify for a mortgage at the end of the lease, avoid the lease-purchase contract at all costs.

Contract Fee

With either of these contract options, you will pay a one-time option fee equal to up to 5% of the home’s purchase price. This fee is not usually refundable, but a portion may apply to your principal if you decide to buy. Feel free to negotiate on the fee amount since there’s no set rate to go by.

Home Purchase Price Determination

The rent-to-own agreement must either include the purchase price of the home or indicate that the seller will set the price at the end of the lease. Getting the price pinned down at lease signing allows you to benefit if the home value rises over the years. To account for that possibility, many landlords set the price higher than the current market value.

Market Ups and Downs

If you expect the market to fall, however, then it might be better to figure out the price at the end of the lease. Unfortunately, there’s really no surefire way to predict which way it will go. You can talk with a real estate professional to assess market trends and get help seeing which option is best.

Maintenance and Repair Agreement

Unlike regular rental agreements, rent-to-own leases may make maintenance and repair your responsibility. Some landlords choose to continue handling the upkeep of the property in case the sale falls through. You will need to thoroughly review the contract to see which option they select.

If you’re responsible for repairs, set aside about 1% of the home value per year to cover it. Also, get minor issues looked at before they escalate to avoid paying out big time for major problems.

How Funds Apply to the Principal

As you pay your rent, the landlord may put a portion aside to apply to the principal at the end of the lease. You can expect to pay a higher monthly rate than the norm for similar homes in your area if that’s the case. But you could end up winning big time in the end.

If you pay $1,800 a month for rent for three years and the landlord gives back 20%, you could get $12,960 put toward the purchase price. You’ll end up even further ahead if you get a portion of the option fee back as well.

With all these factors out of the way, you can sign the rent-to-own contract and live in the home through the lease period. As the lease end date approaches, you must get pre-approved for a mortgage to buy the home as stated in the contract.

Just like conventional mortgages, rent-to-own agreements may not work for everyone. To help you decide if it’s the right choice for you, here’s a look at the pros and cons.

Pros

· Purchase price: Lock in a fair price as the market value of the home increases

· Buy more time: Use the lease period to improve credit, savings, and overall loan worthiness

· Reduce the loan amount: Skip the need for a jumbo home loan by whittling down the principal

· Test it out: Lease option contracts allow you to try out the home before you decide to buy

Cons

· Higher rent: The price goes up to cover a portion of what applies to the principal at the end

· Nonrefundable fees: You could lose money on fees if you choose not to buy that property

· Inability to purchase: Lease purchase contracts demand you buy even if you cannot get a loan

· Market price decrease: Prices could fall, leaving you paying more than the home is worth

Beyond weighing these factors, reflect on just what is rent-to-own homes and how they can help you overcome your barriers to homeownership to decide if it’s a good choice.

You can use the following methods to find rent-to-own homes in your area if you’re certain this is the route you want to take.

· Browse online listing sites: Homefinder.com, Foreclosure.com, and similar sites can help

· Meet with real estate agents: Hire a buyer’s agent experienced in rent-to-own properties

· Work with a brokerage: Look for real estate investment terms with rent-to-own programs

· Ask local landlords: Ask your current or prospective landlord if they want to make an agreement

· Speak with sellers: Not all homes perform well on the market, so ask these sellers directly

Don’t hesitate to ask people in your network if they have any leads as well. You never know who has the right connections and can help you find a great rent-to-own property.

Now that you know how rent-to-own homes work, it’s time to hit the ground running and work toward becoming a homeowner. No matter what path you take, your efforts will undoubtedly end up paying off in the end, so get started today to reach your goal.

 

About the Author

Marie Abendroth

Marie is a skilled content strategist and SEO copywriter with a focus on helping people improve their personal finances and overcome their barriers to success. In her articles, she aims to provide up-to-date info that can help everyone better understand how to invest in a better future.  

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