Unless you have a pile of cash lying around somewhere, then like most homebuyers, you are going to need a mortgage to finance the purchase of a new home. You must have a good credit score, cash for a down payment, and be able to meet other specific stipulations to qualify for this lending product. If you do not have one of these, then the route to home ownership may not even be an option when you want to follow the traditional path.
That is why a rent to own home is a viable alternative for many households. This agreement allows you to rent a property for a specific time period, while also giving you the option to purchase it before your lease reaches its expiration date. A standard contract consists of two parts: the initial rental agreement, and then the option to purchase stipulation.
If you find yourself receiving denial letters because of your financial situation and you want to get into a property that you can call your own, then these are the rent to own homes pros and cons that you will want to consider today.
List of the Pros of Rent to Own Homes
1. A rent to own agreement allows you to purchase with poor credit.
If you cannot qualify for a home loan through the traditional process, then a rent to own contract still gives you this possibility. As you begin to occupy the property, there is an opportunity to begin rebuilding your credit score to qualify for a mortgage later on. You may be able to obtain a loan once you reach the time where a decision to purchase is necessary. This option is particularly beneficial for households who are waiting out the time it takes for a foreclosure, deed in lieu, short sale, or bankruptcy to age off of their credit report.
2. A rent to own agreement allows you to lock in a purchase price.
When you want to live in a market where increasing home prices occur frequently, then a rent to own agreement makes a lot of sense. This contract gives you the opportunity to lock in a purchase price at today’s value even if your intended purchase occurs several years in the future. If the home prices fall in your community, then you still have the option to back out of the agreement as well. It all depends on what makes sense financially based on the amount of money you paid to create this contract in the first place.
3. A rent to own agreement allows you to try the property before you buy.
When you pursue the traditional purchasing process of a home using a mortgage, then inspections are the only way for you to detect potential deficiencies that may be present on the property. If you have the opportunity to sign a rent to own agreement for a house, then you essentially get to take a test drive with the property. You get to live in the house before there is a full commitment necessary to purchase it. That means you can get to meet your neighbors, discover potential issues, and find other problems with the home before it is too late to get out of the contract.
4. A rent to own agreement means you can stop moving as often.
If you are committed to a specific neighborhood or community, then finding a home which offers a rent to own option allows you to get into a property that you will eventually buy. When do you need to wait a few years to clean up your credit or save money, then there is the potential that your family would need to move once per year after your rental agreement expires. If you can secure this type of contract, then there is the possibility that you might be making the last move you ever need to make.
5. A rent to own agreement allows you to create purchasing equity.
When you are in a rent to own agreement, then you will not build equity in the property like a traditional homeowner would with each payment that you make. Instead of having value in the house, your rental payments are creating equity towards the eventual purchase that you intend to make. If your contract covers several years, then the amount that you accumulate through your payments can become a substantial sum that works as your down payment. You can even save money in a savings account to use those funds as well to reduce the overall purchasing price.
6. A rent to own agreement gives property owners more access to buyers.
There are some properties where it is a challenge to attract buyers who are interested. By using a rent to own agreement, sellers can begin accessing an entirely different market where there may be someone interested in purchasing the house in the future. There are plenty of households into each community that cannot qualify for a loan because of their credit, but they all still need to have a place to live. This option gives you an additional out that can still help you be able to profit from the property.
7. A rent to own agreement places the initial option as a potential down payment.
Let’s say that a buyer and a seller come to terms on a rent to own agreement for a property that is valued at $250,000. Using the average 5% option payment, the buyer would need to offer $12,500 at the time the contract is signed to purchase the right to obtain the property at the agreed-upon date. Although that may be a significant sum, it is also above the 3.5% that some lenders require for a traditional mortgage. That means the funds could be used as a down payment or a reduction in the cost of the home at the time of purchase, making it potentially easier to get into a wanted property.
8. A rent to own agreement allows you to live on the property immediately.
A rent to own agreement operates as a lease, which means you will get to move into the property immediately once you finalize the terms of the contract. You are then covered by whatever landlord-tenant legislation exists in your area with this relationship until the time comes where a purchase is necessary. If you find a house that you love, then this option gives you the chance to live there right away instead of waiting for the terms of a loan to come through.
List of the Cons of Rent to Own Homes
1. A rent to own agreement typically offers zero refunds.
When you decide to enter into this type of agreement as a renter, then you are forfeiting the extra payments that you make toward a purchase if you decide to opt out at the time when you are asked to buy. The initial premium payment on a rent to own contract is almost always non-refundable. Sellers in this situation typically keep whatever premium payments are made after a transaction ends if the purchase does not go through. That is why a large option payment is always a risky transaction for buyers who require an alternative way to purchase a home.
2. A rent to own agreement comes at a higher purchase price.
When you decide to pursue a rent to own agreement, it is essential to realize that everything about this contract is negotiable. That includes the purchasing price. Most sellers will offer their property at a higher price because of the extra risk involved with this type of contract. At some point in the future, which is usually 1-5 years from the initial date of the agreement, the option occurs for the purchase. Sellers receive an average of 5% of their assigned property value up front as well, creating up to 10% more in the final transaction in some communities when compared to the typical selling price.
3. A rent to own agreement relies on a financial gamble for buyers.
You may have every intention of improving your credit score over the life of a rent to own agreement. The only problem with this contract is that as a buyer, you are forced to take a gamble that nothing else will happen which could adversely impact your financial situation. Improving your credit can take up to 10 years depending on what your situation happens to be. Anticipating an increase in income so that you will qualify for a loan when your option ends is a risk that might not work out as planned.
4. A rent to own agreement gives buyers less control over the property.
Because you are not completing a formal purchase without rent to own agreement, you are entering a tenant relationship with the landlord instead of owning the home outright. That means you do not have total control over your situation. Landlords could decide to stop making mortgage payments on the property, and then lose it through the foreclosure process. You will not have input on the decisions needed about significant maintenance items in the structure. If your landlord ends up with liens on the property, this could also impact your decision to purchase later down the road.
Each of these elements should be included in the initial agreement to protect the best interests of all parties.
5. A rent to own agreement has you take a financial loss if home prices fall.
There is no guarantee as a buyer that you will be able to negotiate a lower price on a property if the market falls locally. In this situation, you are left with the option of forfeiting all of your money or completing the purchase at a much higher rate than the current market supports. Many lenders will not approve an oversized loan either, which means you will need extra cash at closing for the down payment to bring the lending ratios into a place where the mortgage provider is comfortable.
6. A rent to own agreement often requires 100% compliance with on-time payments.
This disadvantage often depends on the terms included with the rent to own contract. There are times when as a buyer, if you don’t pay your rent on time, then you may lose the right to purchase the property in the future. You would also lose all of your extra payments in this situation. Some agreements are structured so that you would keep the option, but the extra payment for the month is not counted into the final total.
7. A rent to own agreement does not address all potential problems.
Although a rent to own contract for a home could help you discover many of the problems that might exist with the property, it may not provide you information about other potential purchasing issues. There could be problems with the property that you don’t even know about until you initiate the transaction to purchase it.
Title problems are one of the most common issues that buyers face in the situation. That is why you should always treat a purchase like this as if you were following the traditional path to home ownership. Perform a title search and get an inspection before agreeing to anything.
8. A rent to own agreement may not always be legitimate.
There are several rent to own homes that are the foundation of scams intended to take large sums of money away from people who are already in a situation where they are not financially secure. Before you agree to anything, make sure that you follow the necessary steps to verify that the opportunity before you is legitimate.
The pros and cons of rent to own homes offer a solution for households that may be struggling with a temporary financial situation that creates an adverse credit score. Buyers can benefit from this agreement because it gives them access to an entirely different set of demographics for a home that they are trying to sell. As with any real estate transaction, there are specific benefits and risks to consider that are unique to the property in question. Before making a final decision, it is imperative that you speak with a real estate, financial, and/or legal professional about the options which are available in your situation.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.