A rent-to-own home offers prospective buyers several benefits, especially if the buyer is not eligible for a mortgage due to poor credit or a lack of down payment.
Renting to own reduces the overall purchase price of a home over time, locks in purchases prices and can assist prospective buyers in improving their credit score during the contract period.
However, while renting to own offers several benefits, it is not without its potential drawbacks, including an inflated purchase price due to a fall in market value, a potential loss of any payments made towards the purchase of a home and predatory homeowners.
By learning more about rent-to-own properties, including the pros and cons of renting to own a home, you will be able to make an informed decision as to whether or not to seek homeownership through rent-to-own options as well as explore alternative options that may be available to you.
What It Means to Rent to Own
When you “rent to own”, you are essentially renting a property that has the possibility of a purchase in the future. You, the renter, ultimately decides of whether or not to purchase the home at the end of the contract period.
During the contract period, you will be making payments to the home’s current owner with a portion of these payments going towards the purchase of the dwelling, thus reducing the sales price at a later date.
About Rent-to-Own Contract Periods
Rent-to-own contracts generally last for two to five years. During this time, the “renter” will pay an agreed-upon amount each month.
This amount will include a portion of “rent” for use of the property as well as a set amount of money that is put towards the home purchase, should the renter decide to buy at the end of the contract period.
The Benefits of Rent-to-Own Properties
Rent-to-own properties can offer several benefits to prospective homebuyers who wish to purchase the home after the rent-to-own contract period.
These benefits may be especially attractive to buyers who do not meet the requirements of a traditional mortgage or those who do not have a large enough down payment to offer for a mortgage.
Increasing Your Credit Score
If you do not yet meet the criteria for a mortgage, renting to own a home can help you to improve your overall credit score rating.
This is important, as your credit score and history is one of the key factors in determining whether or not you can obtain a mortgage at the end of your rent-to-own contract period.
Furthermore, your rent-to-own contract may increase your odds of obtaining a mortgage through a private lender as you will have already put a considerable amount of money and effort into the purchase of your home.
Saving Money on Down Payments
Most traditional mortgages will require you to provide at least a 10 percent down payment on the purchase of a home. While rent-to-own properties do generally require to provide some form of down payment, the down payment price is often far lower than what a private lender might require.
In addition to saving on your initial down payment, a portion of your rent each month will go towards the overall purchase price of your home, furthering your investment when it comes time to purchase the home.
Locking in the Purchase Price of a Home
When you set up a rent-to-own contract, that contract will include the home’s purchase that you and the current homeowner have agreed upon.
Locking in the purchase price of your home will prevent that price from increasing, even if the market value increases in the home.
The Ability to “Test Drive” a Property Before Buying
Renting to own offers a unique opportunity to “test drive” a property before purchasing.
Living on the property before you own it will help you ensure that you like the home and that you do not run into unexpected problems, such as bad neighbors, HOA restrictions, or expensive repairs.
The Drawbacks of Rent-to-Own Properties
While renting to own a home offers several benefits to prospective homebuyers, rent-to-own properties are not without their potential drawbacks.
By learning more about the cons of renting-to-own, you will be able to make an informed decision on whether or not you should proceed with a rent-to-own contract.
Potential Loss of Down Payment
When renting to buy a home, you are able to reduce the overall purchase price of it through a portion of your monthly payments.
However, should you choose not to purchase the home at the end of your agreement for any reason, such as deciding to move to a new area, you will forfeit any money that you have already invested in the home.
You must read your home purchase agreement very carefully before agreeing to anything or signing a contract when working towards the purchase of a home through renting-to-own.
Predatory homeowners and lenders can make it nearly impossible for you to purchase the home at the end of the contract, based upon your contract.
Furthermore, if a deal appears too good to be true, it probably is. It is also recommended that, if possible, have an attorney review your contract before you sign.
Ineligibility for a Loan
At the end of the contract period, you will likely need to pay a large sum of money as the portion of rental payments that goes towards the purchase will likely not cover the entire sale price of the house.
In most cases, you would then need to be eligible for a mortgage for the remaining purchase price in order to complete the sale.
If you cannot meet the criteria for a mortgage, then you will have to forfeit any amount that you have already paid into the home through the rent-to-own contract.
A Locked-in Purchase Price on the Home
While a locked-in purchase price on a home can benefit you when you are renting-to-own, it can also be a potential drawback of this process.
Should the market value of the house decrease, you will still need to pay the original purchase price that you agreed upon.
Alternatives to Renting to Own a Home
If you are considering renting to own a home because you do not meet the eligibility criteria for a traditional mortgage, it is worth taking the time to learn more about federal programs that could help you qualify,\ even with poor credit.
The Federal Housing Administration (FHA) assists low-income households in the purchase of a home through the FHA loan program.
While the FHA does not provide mortgages directly to borrowers, this program ensures mortgages that are offered by approved lenders in order to reduce the risk to a lender in exchange for reduced eligibility requirements and better loan terms for borrowers.
You may be eligible for an FHA loan with a credit score as low as 500.
However, borrowers with a credit score below 580 must be able to provide a down payment that is at least 10 percent of the house’s purchase price.
If your credit score is 580 or above, you may meet qualifications for a reduced down payment that is as low as 3.5 percent.