We’re all familiar with the traditional path to homeownership, but that doesn’t mean it’s suited for everyone. Whether you’re struggling with your credit, are a digital nomad without the payment history to secure a traditional mortgage, or simply don’t have the significant down payment needed to buy a home right now — a rent-to-own strategy might be a desirable option to consider.
That being said, the details of rent-to-own agreements aren’t as widely known as traditional mortgages. So, how do you rent-to-own a home? In this rent-to-own guide, we’ll look at what it is, how it works, and how it benefits both buyers and sellers.
What is Rent-to-Own?
Jumping into a property purchase isn’t the only route to becoming a homeowner. The rent-to-own strategy reshapes a traditional renter’s lease into one that grants the resident the ability to buy the rented property after a specified period of time.
There are several different variations of the rent-to-own model, but the basic framework is that your rental agreement will include the option to purchase the home at the end of your lease. You can also expect your agreement to spell out how much of your rent will be applied towards the eventual down payment and purchase, along with the agreed-upon purchase price.
A Rent-to-Own Example
Let’s say you find a rent-to-own home that you would like to purchase. Before you and the seller complete the lease agreement, you’ll also agree to the purchase price of the home — for example, the home price is $150,000 while the monthly rent is $1,200.
You make a small down payment of $10,000 at the beginning of your lease. Additionally, $200 of your monthly rent will be applied as purchase payments for a two year period for a total of $4,800.
With this agreement, you’ll have paid a total of $14,800 towards your $150,000 mortgage by the time you’ve hit the two-year mark, leaving you with a total of $135,200 left on your mortgage.
Now, the home is yours and you’ll be making monthly mortgage payments instead of paying rent.
Who is Rent-to-Own Right For?
According to the 2020 Rental Affordability Report by ATTOM Data Solutions, buying a home is more economical than renting in 53% of U.S. housing markets, making homeownership an ideal option for the majority of people who are looking to settle down.
But who should consider renting-to-own on their journey to homeownership?
Of those who choose to enter rent-to-own agreements, 80% are between the ages of 18 to 44. But the fact of the matter is that rent-to-own can be an excellent option for anyone looking to become a homeowner across the country. This is particularly true if you:
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Have poor credit or no credit history
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Don’t have enough money saved for a down payment
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Aren’t ready to take on a full mortgage, but are ready to commit to a home
So, is rent-to-own worth it? This is a question that many people ask themselves when they’re first learning about this homeownership strategy. But, a closer look shows there are benefits for anyone in a situation where they want to buy a home but cannot immediately do so.
Benefits of the Rent-to-Own Strategy
When the renter’s lease is up, rent-to-own tenants have already been building equity in their new home. Most rent-to-own contracts require a rental period spanning 2 to 5 years before it’s time to officially purchase the property. During those years, renters using this method are accumulating wealth through equity in their future homes.
Let’s look at the details. Here’s the scoop on rent-to-own vs mortgage and other common options.
How Rent-to-Own Benefits the Buyer
The typical home buying journey is characterized by jumping between rental properties, paying security deposits and other moving fees, all while saving up on the sidelines for the downpayment to finally buy a home.
When it’s time to buy, prospective buyers will need to apply for a mortgage to fund the purchase. This process comes with strict applicant requirements, appraisals, home inspections, supplemental fees... the list goes on.
On the other hand, the rent-to-own alternative meets all of your needs and optimizes the process along the way. You’re renting while you need to, making payments towards your upcoming home purchase, all while settling into your new property years in advance as you await the deal.
Rent-to-own users get a rental, a home, a jump start on equity, and a seamless move-in process - all in one easy solution.
If you’re a renter who wants to purchase their own home but aren’t currently in the position to do so, the rent-to-own model offers a fabulous alternative — especially if you’re already renting a property that you’d like to purchase.
This system has enabled renters who are struggling with a rough credit score, aren’t in a strong place to take out a mortgage, or are unable to make a significant down payment to embark on the journey towards homeownership.
What Rent-to-Own Offers the Seller
We’ve outlined buyer benefits, but what about the seller? Fortunately, rent-to-own has double-sided benefits.
Selling your home can be expensive. It’s not easy and homeowners can potentially lose a lot if the sale doesn’t go as planned. Couple this with volatility in the market, and it can be reassuring to have a tenant in place (so you’re collecting rent) and a purchase agreement on the table (for a previously agreed-upon price).
Rent-to-own helps sellers overcome many of the biggest pain points of selling their home. You don’t need to search for a buyer, worry about renovating the house, and you’ll still receive secured rental payments before the deal.
It’s smoother, easier, and can be a great decision if carrying your home is becoming a hassle.
Are There Any Risks?
Homebuying always comes with some risks, whether you’re using the rent-to-own model or buying outright.
For a buyer, the most obvious risk is the value of your new home dropping before you actually own it. Since you lock in the price at the beginning of your agreement, it’s possible that the value of your home will decrease by the time you are actually the homeowner. And if for some reason you decide not to purchase the house, you won’t be refunded any of the money you’ve put towards the mortgage so far.
For sellers, there is always the risk that the buyers will backout before the home is sold, putting you back at square one for the selling process. The majority of people, about 67%, who enter into rent-to-own leases fully intend to make a purchase. However, only about 58% actually follow through. There’s also a chance that the home value could increase while your tenants are still renting, but since the price is locked in at the beginning of the agreement, you won’t be able to sell for more.
Search for Rent-to-Own Homes for Sale
The journey to owning your home is yours to make. Whether you decide to rent-to-own, wait it out with the traditional renting process until the time is right, or if you are just curious to learn more, visit HomeFinder to explore your options.
No matter what you choose to do, always consider these key questions to ask when buying a house. And, once you do own, don’t forget about homeowner’s insurance!
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