How do rent-to-own homes work & are they worth it?

While rent-to-own is not a new concept, it has been regaining popularity as a serious option for home buyers. Unfortunately, buying a home is not as easy as it once was. Though mortgage rates are historically low, credit score requirements are getting higher, which leaves many first-time buyers or buyers with less than ideal credit stuck in a seemingly endless cycle of renting. 

But what is rent to own, and is it legit? 

What is Rent-to-Own? 

Rent-to-own is a process that strays slightly from the traditional home buying experience but can have multiple benefits for buyers. But first, let’s define what precisely rent-to-own means in a home buying context.

When you rent-to-own a home, you agree with the seller to rent the house for a contracted period, and at the end of this time, you can buy the home. You will pay a down payment, though it’s typically much less than a traditional down payment, and a portion of your rent each month will go towards a mortgage payment. 

Here is a closer look at how the rent-to-own process works for homes. 

Option Fees

Like a traditional home buying process, there is a down payment required at the beginning of your rent-to-own contract. That being said, while the typical down payment can be upwards of 20% on a home, rent-to-own homes have a non-refundable option fee that’s typically between 1%  and 5%, which makes it a much more affordable option for those who don’t have the savings needed for a sizable down payment. Again, this fee is typically negotiable, so be sure to explore your options before settling on a definitive number. 

Lease Options or Lease Purchase

Rent-to-own has a few different contract types, so it’s essential to be familiar with both so you can make the choice that’s best for you. 

Lease-option is an option type that allows you to buy the home at the end of the contract’s timeline but also gives you the right NOT to buy the home. 

Lease-purchase contracts are created with the end goal of you purchasing the house at the end of the contract timeline. 

Be sure to review your options carefully so you pick what is most beneficial to you. 

Setting a Purchase Price

Another way rent-to-home can give you a bit more leeway as a buyer? Negotiating the terms of the contract and the purchase price of the home. In the traditional home-buying process, the owners set the cost, and you bid against other buyers in a blind-bidding process to see who offers the most money. Even if you pitch a sizable down payment, you may not get the home. 

With rent-to-own homes, you are the only bidder, and you get to have a more hands-on approach to how the pricing and process works. 

Rent

Rent-to-own homes are different because part of your rent goes towards your eventual purchase of the home. This means that you’re slowly but surely paying for the house as you live in it. This often means a slightly higher rent payment than a traditional rental property, but once you own the home, you’ll have the equity you’ve been building during the contracted timeline. 

Purchase

If you’re in a purchase option, you will be buying the house after the term is up, while people in a lease option will decide if they want to buy at the end of the agreement. So when the time comes, you’ll need to be ready to purchase the house for whatever balance remains. 

Is Rent-to-Own Legit?

While there is always speculation about non-traditional paths, rent-to-own homes offer many benefits to home buyers. 

Lower Down Payment

While the typical down payment for a home purchase can be over 20% of the home’s total cost, the average option fee (a downpayment for rent-to-own) is typically between 1% and 5% over the overall cost makes it a much more affordable option.

Less emphasis on credit score

Even though mortgage rates are at a historical low, lenders are raising the bar when it comes to what they deem an acceptable credit score to qualify for loans. With this in mind, if your credit score is recovering or you’re just starting out, you may not be eligible for a traditional loan. With rent-to-own, however, your credit score becomes less of a challenge; though, if your score is very low, you’ll want to do everything you can to improve it.

Rent goes to the house payment

Unlike regular rental payments, which go to the property owners and build their equity, there is a percentage of the payments you’ll be making that go towards paying for the house itself. While you won’t build equity during the rental phase, you’ll get it once you’ve purchased the home.

Option not to buy

If you choose a lease option, you’ll have the ability to walk away from the home’s purchase once the contracted time is up. Maybe the neighborhood is not what you wanted, or you have terrible neighbors, or housing became more affordable in the time during your lease agreement. If you’ve decided to look elsewhere– whatever the reason, you can opt out of buying a house even after living in it. 

The downside to this is that all of the equity you would have gained purchasing the home remains with the current owner, but you’ll have more options at the end of your agreement than you would if you are contractually bound to purchase the home itself. 

The benefits of rent-to-own homes

The process for and the benefits of rent-to-own homes are numerous. Like any venture, doing your research, lining up your finances, and having professionals look at contracts before you sign will all go a long way in ensuring your rent-to-own home experience goes the way it should. In the end, not only will you have saved time, given yourself room to save money, and learned about the home in a way you only can if you live in it, you’ll have a home of your own at the end of the process.