By Alena Kairys

Sep 27, 2021

The most common way to buy a home involves visiting houses for sale and working with a real estate agent and a lender, but it’s certainly not the only way to become a homeowner. The rent-to-own model is a more direct method to buy a home, though it has some quirks of its own. Learn how rent-to-own works and whether it’s right for you.

How Does It Work?

As the name suggests, the rent-to-own model creates a pathway to homeownership by allowing a tenant to purchase the property they’re living in when the lease ends. Finding a lease-to-own property isn’t as simple as finding homes for sale; try asking your landlord if they’re willing to make this arrangement or find a seller whose property has been on the market for a while.

If you’re able to find someone interested, you’ll need to sign a contract and pay an option fee. The contract outlines the lease term, property sale price, rent amount and contribution percentage, among other important details. You and your landlord will need to decide on the home’s purchase price, which should be similar to those of comparable homes in your area. Be sure to get a home appraisal beforehand to ensure there are no major problems with the property and that the purchase price is reasonable.

The option fee is a nonrefundable cost that is usually 1-5% of the purchase price. In this unique renting situation, a portion of your rent will go towards a down payment, so expect your rent to be higher than what your area’s average is. Most rent-to-own leasing periods are around 1 to 3 years. When your lease ends, you’ll be able to buy your house using the extra money from your rent payments, though you will still need to work with a lender to get mortgage approval. Even if the end of your lease is a few years in the future, it’s a wise idea to meet with a lender early on so they can help you with preparations.

Note that rent-to-own agreements come in two varieties: lease-option and lease-purchase. The former gives you the ability to buy the home when the lease ends. If you decide not to buy, you’ll likely lose the extra money that was to be put towards the home purchase. The latter legally requires you to buy the property when the lease is up, which can pose problems if you’re unable to get approved for a mortgage. Since these two leasing types have very different outcomes, you need to understand which one you’re agreeing to and what the consequences are if you aren’t able to buy in the future.

What You Should Know

Agreeing to a rent-to-own contract has more moving parts than an ordinary lease. Before committing to anything, you need to consult a reliable real estate attorney to review and explain the contract. Unlike real estate transactions that use a real estate agent, there is no industry governing board for rent-to-own setups. Make sure you understand how much of your rent is going towards your home purchase and where those funds will be kept. An escrow account is generally a safe method for storing these payments. Always keep documentation of your rent payments; you’ll need to provide this information to your lender, and it can protect you if you discover any issues. In a typical renting situation, a landlord will pay for maintenance costs, but that responsibility may be on you if you’re renting to buy. Check that your contract discloses which party oversees upkeep and defines the extent of said repairs. It should also have provisions about who pays property taxes and insurance. Be aware that you could over or underpay for your home depending on the market’s conditions at the time of purchase.

Is It Right for You?

Renting-to-own can be beneficial if your credit is poor and you need time to improve it. Ideally, you’ll have a healthier credit score at the end of the lease which will make preapproval easier. Unlike more traditional means of buying a home, you won’t have to worry about scouring multiple listing sites for a home you like. This minimizes some of the legwork you’d normally have to do, and you won’t have to worry about competing with other buyers. Renting-to-own could be a good option for you if you’ve fallen in love with the home you’re living in and see yourself living in the area long-term. Fortunately, if you decide rent-to-own isn’t for you, there are plenty of great loan programs with flexible income and credit requirements, and even first-time homebuyer incentives.

While rent-to-own is a legitimate way of becoming a homeowner, you need to understand the legal and financial risks. The best way to prevent unpleasant surprises is to go over your contract with a lawyer and make sure you’re protected in your contract.

If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!

NFM Lending does not provide legal counsel. Please consult a real estate attorney with any questions. The pre-approval may be issued before or after a home is found. A pre-approval is an initial verification that the buyer has the income and assets to afford a home up to a certain amount. This means we have pulled credit, collected documents, verified assets, submitted the file to processing and underwriting, ordered verification of rent and employment, completed an analysis of credit, debt ratio and assets, and issued the pre-approval. The pre-approval is contingent upon no changes to financials and property approval/appraisal.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.