Home Buyers Guide: Understanding Rent-to-Own Homes

How to buy a house that's rent-to-own

Your heart is set on the home of your dreams, but you can't yet afford to buy it. Before you give up hope, there may be another option: rent-to-own.

Defining rent-to-own

Because this method for buying a home is less common than buying a home with a traditional mortgage, many home buyers are unfamiliar with rent-to-own agreements. If you're among those wondering, ‘what is rent to own?', this definition will help.

Rent-to-own is shorthand for rent-to-own agreements. Rent-to-own agreements allow buyers and sellers to come to terms about the future purchase of a house. They're created to allow home buyers to purchase a home from home sellers without a traditional mortgage at the time the agreement is signed. Often rent-to-own agreements are put in place when a home buyer is unable to buy a home in the traditional manner and the other party is having difficulty selling a house.

Demystifying rent-to-own agreements

In most rent-to-own agreements, a prospective buyer rents a home for one to three years, essentially extending the home sale's closing date. At the end of the agreement, part of the rent may be credited toward the down payment or closing costs. Different terms are used to define a rent-to-own agreement—some are called lease-to-own or lease purchase. Another available choice for renters is a lease option, in which renters have the right to buy the home before anyone else, but they are not under a contractual obligation to do so.

Rent-to-own advantages

For renters who are having some financial difficulties, rent to own may be a desirable option. Rent-to-own may be considered for:

  • Buyers who do not have enough money for a down payment.
  • Buyers who are struggling with poor credit.
  • Buyers who want to live in a specific neighborhood—perhaps because it has good schools and parks for their children—but cannot yet afford a home there.

Entering into an agreement gives buyers time to build up savings, bring down debt or reverse a poor credit rating.

Rent-to-own drawbacks

While a rent-to-own home may help get you into your dream house, it comes with some drawbacks and risk. First, rent-to-own agreements may be more complicated than buying a house outright. Also the rent charged may be higher than market rates. If you decide not to buy, you won't get the money back.

If you are considering a rent-to-own agreement:

  1. Learn whether the asking price is reasonable. To get the answer, ask a real estate agent to look at comparable homes that have just sold in the neighborhood.
  2. Seek a lawyer's assistance drafting the contract between you and the seller and conducting a title search. (You want to be sure the title will be clear when you close on a mortgage loan.)
  3. Make all rental payments by check. That way, you'll have a paper trail showing you made payments on time. And, if your rent-to-own agreement includes rent payments, you'll have proof of what you paid so you can be sure the credit toward the purchase price is correct.
  4. Hire an inspector. If the inspector finds major issues, you can negotiate the repairs with the seller before signing a contract or paying a deposit.

Also, before entering a rent-to-own home agreement, you'll want to check with your insurance company. Some companies will not insure a home that is not owner-occupied. As a renter, you may need your own renters insurance policy to cover liability risks and contents, while the home owner may need to obtain a policy just for the dwelling itself.

Deciding if a rent-to-own agreement is right for you

When you enter into a rent-to-own agreement, you not only gain time to build up savings or improve credit. Rent-to-own homes may also provide other benefits:

  • You may be able to build equity sooner.
  • You may save money if you lock in a price before the house's market value increases.
  • You may have more time to shop around for and secure financing.

How to create a rent-to-own agreement

You've found the perfect house, and the seller has agreed to enter a rent-to-own agreement. What do you do next? An attorney can help you draft an agreement that includes the:

  • Timeframe for the agreement, including the number of months or years you will rent and when you will receive keys to the house
  • Monthly rent payments
  • Responsibilities for utility, insurance and tax payments, payment of other fees and costs for maintenance and/or home improvements

A rent-to-own home agreement requires time and legwork to develop. But, it may be an option that helps you get one step closer to owning the home of your dreams! Happy house hunting!