Is Rent-to-Own Right for You?

In today’s economy, most people have to think creatively if they want to make a purchase, especially a large one like a house. That’s why the rent-to-own process has become so popular.

If you have less than perfect credit, can’t qualify for a traditional loan, or don’t have enough savings for a down payment, maybe rent-to-own ownership can help.

These purchase programs are a great way to get into the home you want, while also limiting your initial investment and risk. Rent-to-own agreements offer you the chance to have the security of a place to live now, with an option to buy the property at the end of a lease and specified period, for a predetermined price.

Here, we will talk about the pros and cons of rent-to-own homeownership and give you some tips on the rent-to-own process to help you figure out if it is right for you and how you can use it to your advantage.

A rent-to-own home allows a tenant to rent a property, but also gives them the option to buy it before the lease expires. Aside from the potential financial advantages, this live-in “test drive” offers a period of time before you choose whether you want to buy the home. This can be a great way to find out if you like the neighborhood, gives you a chance to save up cash and eliminate other debt, potentially putting you in an overall better position for you and your family

Before signing up for rent-to-own agreements, it’s important to understand a few key things about these kinds of contracts. The first is that they are not the same as purchasing a home in a traditional way with a mortgage loan. A typical rent-to-own arrangement has two parts: the rental lease agreement and the purchase option.

This means you have a written understanding with the owner on terms, a price, and a path toward eventual ownership. You have a right to break the lease, if you need to get out of it. You should also understand the property owner can void the agreement as well. Before you sign, know clearly what you are getting yourself into.

The rental lease agreement portion is similar to nearly any other lease. Under the agreement, you would consistently pay a set amount of rent while living in the home. This should also clearly explain the conditions of what you can and can’t do while in the property.

The purchase option portion of the agreement gives you the right to buy the home at some point in the future – either during the lease period or at the end.

These lease-purchase contracts lay out how the purchase price for the home will be determined and how, or if your rent payments would apply toward the purchase.

Although they can be more flexible, since you are dealing with an individual owner. Some rent-to-own agreements require good credit. This is because the owner will want to make sure you’re likely to pay, and on time. This does not mean you won’t be able to enter into lease-purchase contracts if you have bad credit, but it does mean you may pay a higher interest rate or monthly payment amount.

There are two main types of rent-to-own agreements: lease-option agreements and lease-purchase agreements. It is really important for you to know the difference, before getting started. Lease-option contracts give you the option to purchase the home after the agreed-upon leasing period ends. Lease-purchase contracts legally obligate you to buy the house after your lease ends. If you have questions about either, reach out to a professional for help. Rent-to-own contracts can be complicated. If you need help understanding Lease-option contracts, lease-purchase contracts or need clarity on what you are about to sign, ask questions and get help. A good place to start for financial questions is GreenPath. Call to set up an appointment with a trained professional at (800) 550-1961. Also, read this article for housing counseling, information and resources for renters.

There are several pros of rent-to-own homeownership:

• Peace of mind – Rent-to-own allows you to get your foot in the door, as well as locate a great neighborhood where you can settle down. You don’t have to worry about homes outpricing your budget, because you can “lock-in” a payment and living situation you really like. This is important, if you plan on staying in an area for a long time and are concerned about rising prices.
• Credit scores – Landlords and potential rent-to-own sellers may be more accepting of past credit issues than traditional lenders like banks or mortgage companies. This can be helpful if your credit took a recent hit, but you are moving into a position to rebuild it in the near future.
• Improving your purchasing power – The rent credit portion of your agreement lets you save money towards the purchase price of the home. Remember, this is not the same as traditional equity, since you are not the owner yet. By approaching your agreement this way, you are investing in your future rather than investing in a home. It’s crucial to remember that any money saved in a bank should not be touched. If you tend to spend all of your money, this is important.
• Secure your purchase price – As external forces like inflation affect interest rates and housing prices, being able to lock in a price for a home you’re interested in can be important. A rent-to-own agreement should specify the final, agreed-upon purchase price of the house. It may be a bit higher than current market value, in a rising market, but that locked-in price could prove invaluable down the road, when it’s time to finish the agreement.