What is a rent to own home?

April 17, 2017

In years past, the term “rent to own” was rarely heard, but recently, buyers and sellers have been turning to this deal for different situations. Homeowners that have had trouble selling their home and buyers with past credit issues may find this as a creative option that accomplishes their goals.

Like a normal lease situation, buyers will pay rent each month, with a portion dedicated toward the eventual purchase of the home. The agreement typically lasts two to five years, with the potential buyer needing to exercise their purchase option at the end of this term.  If they are unable to purchase at the end of the term, they will forfeit their option payment and any rent credits they’ve accrued.

Pros and cons of the rent to own agreement

For buyers, they will find their main advantage is time to build up a credit history that allows for a mortgage approval before they must exercise their purchase option.  Another benefit to the buyer is that this type of deal allows them to test out the home and neighborhood with a more flexible out than a mortgage would provide.

As discussed above, buyers need to be aware that only a portion of their rent will go towards the eventual purchase of the home. Along with this, they need to check with their lender to see how much of the rent credit will be applied to their mortgage credit.  Many lenders only allow the credit be equal to the rent amount that was paid above the normal market rate for rentals in that area.

For example, a home that could be rented by its owner for a rent of $1200 may be rented for $1400 in a rent to own contract.  The extra $200/month would be credited at closing, as that amount is over the normal market rent.  In the same example, if the rent was set at $1000/month with $400 going towards the eventual purchase, the lender may only allow a credit of $200/month on the settlement paperwork.  This is not saying that the money will not be given to the buyer, this is simply a question of what is creditable in the eyes of the lender on paper.

Seller may find this deal attractive because it opens up a new market of potential buyers that will have a larger amount of money invested to keep them interested in preserving the property. A potential downfall for sellers is in this contract, the buyer can walk away at the end of the term and that seller will need to go through the process of finding a potential buyer again.  There is also the issue of a seller doing harm to a home; however, this is more offset by the larger downpayment and rent than a seller would typically get in a standard lease.

If you have any questions on rent to own agreements or think it may be a good option for you, please give us a call at 216.309.0567.