Rent-to-Own HomesCASAPLORERTrusted and Transparent
What are Rent-to-Own Homes?
Rent-to-own homes are similar to regularly renting a home, but they differ in that you are given an option to buy the home at the end of your rental contract. At the same time, a portion of your rent payments will go towards saving up for a down payment should you purchase the home.
If you would like to purchase a certain property, but do not currently have the means to do so, a rent-to-own agreement allows you to live in that home in the meantime. Rent-to-own provides a few benefits that will help you on your way to homeownership:
- Saving up for a down payment
- Fixed home purchase price
- Time to improve your credit score
Saving Up For a Down Payment
Purchasing a home means that you would have to have thousands of dollars for a down payment . If you find your dream house on the market but you currently do not have enough money for a down payment, a rent-to-own home agreement can let you move into the home while you build up your savings.
Rent-to-own agreements also have a built-in savings feature that takes a portion of your rent to be used towards the future down payment on the home or against the price of the home. These are called “rent credits”. This is often as a portion of your monthly rent payment, usually 25%. Most rent-to-own homes will have a higher monthly rent than regular homes for rent, but the extra rent that you will be paying each month will be used as an imposed savings. This forces you to save up money, which might be helpful for those who might otherwise have unhealthy financial spending habits.
However, while some rent-to-own agreements allow your rent credits to be refunded to you, which allows you to use them as a down payment, this may not always be the case. Some agreements might have the rent credits to be applied against the price of the home. In that case, the rent credits do not serve as a substitute to a down payment. You will still need to save up for a down payment if your rent credits are not refundable.
Fixed Home Purchase Price
When you negotiate your rent-to-own home contract, you will either choose to have the purchase price of the home to be determined in advance, or have the purchase price be the market value of the home at the end of your rental contract.
Locking-in the purchase price of the home makes it more predictable of whether or not the house would be affordable to you . However, the locked-in price can often be higher than current market prices to take into account possible increases in the price of homes in the future. If the prices of homes decrease in the future, your locked-in purchase price might be significantly higher than what the home should be worth.
For example, the current price of a home might be $280,000 and you might be locked into a purchase price of $300,000. In five years, the current market value might increase to $350,000, meaning that you would save $50,000. If the price of the home in five years is below $300,000, you would be paying more for the home then you would otherwise have paid if you purchased it without the contract.
Time to improve your credit score
Rent-to-own contracts usually range from one year to five years. If your financial situation or credit score is currently poor, you might find it difficult to qualify for a mortgage. You can use the time that you are renting to improve your credit score to help increase your chances of being approved for a mortgage or getting a better mortgage rate .
How do rent-to-own homes work?
Rent-to-own is also known as a lease option or a lease-purchase contract. As the name suggests, you are renting with the option to purchase the home. Most homes for sale or listed for rental are usually not rent-to-own homes. While there are rent-to-own home listings, you can also approach sellers of homes currently listed for sale or current rental listings and negotiate a rent-to-own home agreement.
Let’s consider a $300,000 home that you will rent-to-own for five years. Your monthly rent is $1,000, and 25% of that will go towards rent credits. Your total rent payments after five years is $60,000. The total rent credits after five years is $15,000 (25% of $60,000). You can use this $15,000 as a down payment for the home. $15,000 is equivalent to a 5% down payment for a $300,000 home.
Rent-to-Own Home Contract
A Rent-to-Own agreement can either be a Lease-Option or a Lease-Purchase.
- A Lease-Option agreement combines a standard lease contract with an option to purchase the home. An option is not an obligation. You are not forced to purchase the home at the end of your rental term. However, while you can choose to not purchase the home, you will lose any rent credits that you have saved up for the down payment of the home. You can purchase the home at any time up until the end of your rental contract. After the contract expires, you lose the right to purchasing the home. Your landlord can then put the home up for sale or find other buyers.
- A Lease-Purchase agreement combines both a standard lease contract with a purchase contract. With a Lease-Purchase, you agree to purchasing the home at the end of your rental period. If you do not purchase the home, you can be liable for breaking the contract, even if you cannot purchase the home such as by not qualifying for a mortgage. Since you are locked into purchasing the home, you may want to make sure that you are able to qualify for a mortgage and that you are certain that you would like to purchase the home.
Rent-to-Own Home Option Fee
Having the option to buy the home does not come without a cost. Since the seller or landlord of the home will be giving up their right to sell to another homebuyer, you will usually have to pay an option fee. An option fee is a percentage of the purchase price of the home, and can be between 1% to 5%. This can be a non-refundable deposit towards purchasing the home. If you choose not to purchase the home, you will lose the option fee paid. The option fee can be negotiated.
When you are renting, your landlord is responsible for the cost of maintenance and repairs. However, with rent-to-own agreements, you will usually be responsible for repairs and maintenance. This means that even if you do not end up purchasing the home, you may have paid thousands of dollars in repairs that you will not keep.
A portion of your monthly rent will be set aside to be used when you purchase the home, usually 25% of your monthly rent. However, this means that your rent will be more expensive than a regular home rental. If you do not purchase the home, you will lose the rent credits that you have paid into.
Purchasing a Rent-to-Own Home
Once your rental term is nearing its end, it is time to decide whether or not to purchase the home. If you choose not to purchase the home, you are free to move out and rent or purchase any other property if you have a lease-option agreement. You will lose money that you have put towards the house, such as any repairs or maintenance that you have done, the option fee, and the value of your rent credits.
If you have a lease-purchase agreement, you are required to purchase the home. Failure to purchase the home, such as if you cannot qualify for a mortgage or if you have changed your mind, can cause you to incur penalties. In some cases, the current market value of the home might be well below the purchase price that you agreed to in your contract. It can be beneficial to you to break the contract and pay penalties instead of purchasing the home for an inflated price.
When negotiating your lease-purchase agreements, you may include break clauses into your contract that allow you to break the lease-purchase agreement without penalties. This can include a clause if you cannot qualify for a mortgage, or if home values decrease.
If you do choose to purchase the home, you will need to find financing to pay for the home. Hopefully, your improved financial situation will allow you to qualify for a mortgage easily. Once you have gotten a mortgage, the home is officially yours. There is no need to move in, as you are already living in the home!