What Is A Rent-To-Own Home?

What’s the biggest obstacle to becoming a homeowner? For many, it’s having significant savings for the house’s down payment. Even if the home isn’t a multi-million dollar mansion, you could need tens of thousands for the down payment. Do most of us have that kind of cash sitting around? No, but with a rent-to-own agreement, you may not need it.

What Is A Rent-To-Own House?

As you can probably figure out just by looking at its name, a rent-to-own house is one you can rent and eventually buy. It combines the best of the renting and owning worlds by addressing the following issues.

Problems with renting:

• As you pay the monthly rent to the landlord, that cash disappears, and you have nothing to show for it other than a roof over your head.
• The more you get stuck in the renting cycle, the harder it can be to become a homeowner since most of your cash goes to the landlord.

Problems with buying:

• As mentioned, you need a ton of cash for a down payment to get approved for a mortgage. Even if you only put three percent down on a home via some special program, that will likely equal thousands of dollars you don’t have due to a limited income.
• Getting approved for a mortgage can be tough if you don’t have sufficient income, savings for a down payment, and your credit history is less than ideal.
• Even if you manage to buy a home, you may find that unexpected repair costs are overwhelming.

How can a rent-to-own home overcome those issues with renting a buying? By letting you rent the home for a few years, build up a down payment, and eventually purchase and move into the home if you’re ready, or move on to somewhere else.

How Rent-To-Own Agreements Work

If it sounds like a rent-to-own home is precisely what you’ve been looking for, here’s what such an agreement entails. First, you agree to rent the home and make monthly payments to the landlord that exceed the fair market value. The rent amount that exceeds fair market value will be used towards the eventual down payment on the home if you decide to purchase it in the future.

Second, you will probably agree to split the repairs with the landlord while renting the property.
The landlord may agree to pay for expensive, major repairs, while you’ll agree to cover smaller fixes that are minor.

Third, your rent-to-own agreement may include an option fee that holds the home for you and gives you the choice to buy it once your lease is complete. Most option fees range from 1-7 percent of the home’s value, and can be used towards the down payment later on.

Fourth, once your lease is over, you will have the option to buy the home or move on, depending on the type of rent-to-own agreement you pick. If you want to buy the home, you will need to get approved for a mortgage and use your accumulated down payment to pay the lender. If you don’t want to buy the home because you no longer enjoy the property or the location or need to relocate, you will likely forfeit the excess rent payments and the option fee to the landlord.