Rent-to-Own: How Does It Work and When
An alternative method of buying a home is a rent-to-own agreement, also known as a lease or lease-to-own agreement. A buyer who goes into a contract like this agrees to pay the rent for a particular property within a preset duration, before deciding whether they want to purchase it on or prior to the expiration of the lease.
A rent-to-own agreement may is usually perfect for people who want to own a home but have not secured a mortgage, or those who are not yet ready for the commitment that ownership requires. Say you have a bad credit score, but this is only because of temporary issues that are now behind you, and you have been doing fairly and consistently rebuilding your credit ever since. Perhaps your debt-to-income ratio is excessively high, but not by a lot, and your budget can accommodate extra payments and decreasing your debt substantially over the next few years.
You may have a job that pays really well, or landed a new job where the salary is higher, but because you’ve only been there less than a year, your lender does not consider your income stable enough. Likewise, you may be successfully self-employed, but lenders think your track record is not enough to make them comfortable. Or you may have saved some money but it’s still enough to cover the typical down payment for a home, which is usually around 20% of the purchase price.
If your situation resembles any of the above, then a rent-to-own agreement may just be your best bet. You can lock down a house that you like now while you improve your credit score, extend your employment or business background, add to your savings or do whatever other things that will increase your chances of getting a mortgage. And, if a part of the rent or option gets close to the purchase price, you start building some equity as well.
To make a rent-to-own agreement work, potential buyers have to be sure that they are prepared to make the purchase as soon as the lease expires. If you honestly think there’s more than a 50% chance that you will move out and not proceed with the sale, think twice. It’s highly improbable for an owner or landlord to agree to a refund of the rent credit and the option fee to give you that flexibility of moving.
If you see even the slimmest chance of you not qualifying for a mortgage or any other financing before the lease expires, you should probably just keep renting, fixing your credit, and saving up for a down payment. And when you’re all set and ready, you can select any house on the market that suits your taste and needs, and of course, your price range.