Rent-to-Own: How Does It Work and When
A common option to purchasing a home is referred to as a rent-to-own (lease or lease-to-own) agreement. When a buyer signs this type of contract, they agree to pay rent for the property for a particular stretch of time before taking an option to buy it on or before the expiration of the lease.
A rent-to-own agreement can be the best option for people who are interested in owning a home but have not been qualified for a mortgage, or those who are yet incapable of meeting the demands of being a homeowner. For example, you have a bad credit score but the factors that brought you to this position are now behind you, and you have been steadily working on getting your credit act together. Maybe you a have high debt-to-income ratio, though not by much, and you can afford to make additional payments and bring down your debt considerably within the next two or three years.
You might have a job with a pretty good salary, or landed one with a bigger pay than your old job, but it’s only been a few months and your lender isn’t convinced that you have a stable income source. In the same way, you may be successfully self-employed, but your track record is not comfortable enough to lenders. Or probably you have actually started saving, but you still don’t have enough to make the usual 20% down payment on a home.
If any of the above is true to your situation, renting to own could be your best option. You can lock down a house you like for a period of time, and in the meantime increase your odds of getting a mortgage by improving your credit score, saving more money, and doing whatever else it takes to achieve your goal. And, in case the option money or percentage of the rent comes close to purchase price, you can start to build some equity at the same time.
To make a rent-to-own agreement work, potential buyers have to be sure that they are prepared to make the purchase as soon as the lease expires. If you honestly think there’s more than a 50% chance that you will move out and not proceed with the sale, think twice. Finding a landlord or owner who agrees to refund rent credit and the option fee so you can move when you want to, is highly unlikely.
If you honestly believe there’s a chance for you not to get qualified for a mortgage or any other type of financing by the time the lease expires, you should continue renting with a typical lease, improving your credit, and saving money for a down payment. And when you’re ready, you can choose any home on the market that fits your taste, needs and price range.