Renting to buy a home can give some buyers the opportunity to purchase a home that they might not otherwise have. If you do not have a full down payment on a house, you have poor credit or you do not qualify for a traditional mortgage, renting to own can be a viable option in becoming a homeowner. While there are several potential benefits for these types of properties, rent-to-own does come with its potential drawbacks, including predatory homeowners, poor regulations and the potential loss of any money that you put toward the purchase of the home.
When you are renting to buy a home, a contract will be created and signed by both you and the homeowner. There are generally upfront fees and monthly rental payments, with a portion of these payments going toward the purchase of the home. Contracts generally last between two and five years, but may last longer, depending on the contract. After the contract period, the buyer can then apply for a mortgage for the reduced cost of the home, and follow normal home-buying procedures from there.
Rent to own properties have become fairly common. However, before embarking on this type of homeownership, it is important to learn more about the practice, and how you can avoid some of the most common pitfalls.
Pros of Rent-to-Own Properties
Renting to buy a home allows buyers to reduce the overall price of a home, and live within a home, while intending to purchase the home at a later date. It can be a home-buying viable option for those who may not qualify for a loan or do not have a large enough down payment. In fact, renting to own practices can offer several key benefits that can be very attractive to buyers.
Helps Improve Your Credit Score
If you are working on improving credit history and your overall credit score, rent to own practices can offer several benefits. Your overall credit score and your credit history has a significant impact on whether or not you will qualify for a mortgage. While there are some federal programs that offer insured mortgages, thus lowering the minimum credit score requirements for a mortgage, any type of loan that you apply for will have a minimum credit score requirement.
Renting to buy a home can help you to improve your credit, due to the contract between you and a homeowner. Participating in rent-to-own practices can also potentially improve your odds of being approved for a loan. In the eyes of a lender, rent-to-own borrowers have already put time, money and resources into the home that they would like to purchase.
Helps You Save for a Down Payment on a House
Coming up with a down payment on a house can be difficult, depending on your current debt-to-income ratios. Most mortgage lenders require at least a 10 percent down payment. While some government programs can reduce potential down payments, most of these programs include mortgage insurance requirements, which can increase the overall cost of the home throughout the life of the loan.
Rent to own properties usually require some amount of money up front, but generally not anywhere near the amount that a mortgage lender might require for a down payment. Additionally, a portion of the rent that you pay each month will go toward the overall price of the home, thus reducing the amount of money you will need to borrow from a mortgage lender, when the time comes.
Locks in the Price of a Home
Your home purchase agreement will include the purchase price of the home that you will be renting to own. Therefore, renting to own restricts the homeowner from increasing the purchase price of the home, due to any market fluctuations. Locking in the price of a home can be incredibly beneficial, however, it is also worth knowing that the purchase price will not be reduced either, even if the value of the home should fall below the price listed in the purchase agreement.
Cons of Rent-to-Own Properties
While rent to own properties can potentially offer several benefits to future homeowners, these properties are not without their potential drawbacks. Predatory homeowners, shady business practices and poor regulation can make these purchases a bit of a gamble. Therefore, it is important to review the most common drawbacks of renting to own practices, in order to avoid common pitfalls.
Loss of Down Payment
If you are renting to buy a home, and you decide you no longer wish to purchase that home for any reason, any money that you put towards the purchase of the home, in initial fees or monthly rental amounts, will not be returned to you – in most cases. This can lead to a significant loss, depending on the fees that you have already paid toward a home’s purchase.
If you are considering a rent to own property, it is important to review the amount of the initial and rental fees that will go toward the purchase of the property. You are strongly encouraged to hire both an appraiser and inspector for the home before signing a contract with the homeowner. Some of the most common reasons a prospective homeowner may back out of an agreement is due to significant repairs that need to be done on the home, the fall of the home’s value or a mislabeled value on the home, from the start.
Predatory Home Owners
It is crucial that you read your home purchase agreement carefully, before signing anything, if you intend to rent to own a home. Predatory lenders can word an agreement to make it near impossible for you to complete your purchase at the end of your contract. Additionally, any rent to own property that does not include a contract may be a scam, and should be avoided. If a deal is too good to be true, it probably is.
Your home purchase agreement should include several key pieces of information. This includes:
- The purchase price of the home when you are ready to close at a future date.
- The term length, or number of months that the contract will be applicable (you must complete your purchase by the end of this contract).
- An explanation of any upfront payments and whether or not they will become a part of your down payment if you complete the purchase (typically no more than 1 percent of the purchase price).
- Rental provisions, including the due date for rent and penalties for late payment, rules, approval of pets and whether or not modifications to the premises are permitted.
Go over any type of rules for the rental agreement. This can significantly reduce your chances of having the contract cancelled, thus losing the money you have put in toward the purchase, in the event of a breach in the contract.
Your home purchase agreement should also include information regarding who is responsible for the cost of repairs and property taxes. A common predatory tactic is to have the tenant responsible for repairs to the home and/or property taxes. If you are responsible for repairs to the home, you may want to consider hiring an inspector before signing anything. An inspector can identify pre-existing conditions that the homeowner should then repair, before the contract is signed.
If considering renting to buy a home, it is important to understand that these buying practices are not as regulated as they should be. Poor regulation has led to instances of predatory homeowners, questionable policies and even scams. While rent to own properties can be incredibly beneficial to some, it is crucial that you do your research, and that you read any agreement between you and the homeowner very carefully. By taking the proper precautions, you may be able to navigate through the rent-to-own process, and benefit greatly from it. However, experts do caution these practices, and most experts will strongly suggest obtaining a mortgage, rather than renting to own a property, if at all possible.