What Is a Rent-to-Own Home?


What Is a Rent-to-Own Home?

When we refer to a rent-to-own home we're talking about a home that was purchased through a rent-to-own contract such as a lease-option or lease-purchase agreement. A rent-to-own home is a type of real estate purchase that differs from a traditional mortgage. Rent-to-own real estate is a fast-growing market and is quickly growing in popularity due to the lower requirements to get started.

A rent-to-own home is an ideal choice for potential homebuyers who may not have great credit and need a little more time to build up savings before taking on a mortgage. In a rent-to-own real estate purchase you'll start off as a rental tenant, making rent payments and signing a lease agreement. Though this differs slightly from a standard rental agreement it is very similar in a broad sense.

The main different between renting and a rent-to-own lease is that you'll have the option to purchase the home you've been renting at the end of the lease term. The lease terms usually last 1-3 years but can be negotiable. At the end of the lease you will have the option to purchase the home just like you would do in a traditional mortgage, except in this case, a portion of the rent accumulates in escrow during the lease period to help you with the down payment.

Rent to Own Lease agreements

The starting point of any rent-to-own home purchase is the lease agreement. Lease agreements are typically anywhere between 1 to 3 years but it's not unusual to be as long as 5 years. To get things started off you'll pay an option fee and then move into the home on a lease. During the lease you'll be paying rent on a monthly basis and along with a rolled in rent premium. The option fee and the rent premium are investments that go towards the down payment on the house for when the lease term has ended and you decide to purchase the home. In this beginning step it is a good idea to have a real estate attorney review the terms of the lease agreement to ensure the terms are accurate and fair.

Building credit and savings for a Rent to Own

After you've signed the lease and moved into the it's time to build up your savings and credit scores. Building up your credit scores will ensure that you will qualify for a loan and saving up money will help you make a down payment on the house. You will also need to cover any closing costs for when you decide to exercise your option to purchase the home.

Exercising your option and making the purchase

Once your lease term has ended you will have the option to purchase the home you've been renting. Hopefully during the time you've been renting you were able to save up enough money and qualify for a loan so that you can get a mortgage and purchase the home. If you do not exercise the option, you will lose out on the option fee and the rent premium.

Now that you've learned a bit more about rent-to-own housing you can search for rent-to-own properties in your area and get started on your path to homeownership.