What if there was a way to pay rent and not have to come up with a massive down payment for a home, but end up owning your home at the end of the day?
There is, and it’s called a “rent-to-own” program.
Getting approved for a traditional mortgage these days can be tough, especially with the rising price of homes. And if you don’t have the credentials that lenders are looking for, you may be out of luck when it comes to securing a mortgage for a home purchase.
But you don’t necessarily have to be out of the home-owning game just yet. Rent-to-own programs may be available to you if you meet the right criteria.
So, what exactly is a rent-to-own program and is it something you should consider?
What is a Rent-to-Own Program?
Rent-to-own leases involve tenants agreeing to rent out a property from a landlord. But rather than 100% of the rent payments going straight to the landlord, a portion of them are put towards the equity of the property.
The contract will stipulate an end date, at which point you’ll either have the option to buy the home or waive your option to purchase. If you decide to buy, you’ll be purchasing at the agreed-upon price that was negotiated at the onset of the contract.
Sounds pretty neat, right? Well, it can be, but there are also some potential drawbacks to these arrangements that all buyers should be made aware of before diving into such a contract.
Let’s outline some of the pros and cons of rent-to-own programs so you can make a more informed decision about whether or not this type of set-up is right for you.
Pros of Rent-to-Own Programs
There are several reasons why some buyers may choose a rent-to-own program over traditional renting or buying.
Purchase with bad credit. If you’re unable to qualify for a conventional mortgage or simply cannot afford to buy right now, you can start off your homeownership journey with a rent-to-own program. This is perhaps the biggest reason why buyers chose this route and is one of the biggest advantages of this type of program. And if you do things right with your finances, you can actually rebuild your credit score and increase your chances of being able to secure a home loan once you’re finally ready to buy.
Build equity. When you rent, you’re only contributing to your landlord’s equity, not yours. But with a rent-to-own program, a portion of your rent goes towards your equity. Over time, this can accumulate a great deal, and when it’s time to exercise your option to purchase, you’ll already have built up some equity in the property.
Take advantage of appreciation. If the agreed-upon purchase price of the home ends up being a lot lower than what the home ends up being worth when the lease expires, you stand to benefit from appreciation. The increase in value over the time you’ve been paying rent will provide you with instant equity. This is a huge advantage for buyers.
Test out the home before committing. The thought of committing to a specific home can be a little scary, considering how expensive these purchases are. But with a rent-to-own program, you can essentially test out the property and the neighborhood for two or three years to see if this is a place you think you can settle in for the long haul. If not, you can walk away and move on to the next property.
Cons of Rent-to-Own Programs
While there are certainly a number of advantages of a rent-to-own program, there are a few downfalls to consider.
Can be expensive. Although buying a home the traditional way is an expensive endeavor, rent-to-own programs can also be a bit pricey. Landlords may ask you to cover upfront fees that are non-refundable in order for you to be eligible to exercise your option to buy at the end of the lease. These fees can sometimes be just as expensive as a down payment and closing costs if you don’t work with the right people. In addition, landlords sometimes charge more for a rent-to-own lease with an option to purchase than they would for a typical lease.
May lose your equity. If you decide to buy the property when the lease expires, great. If not, all that money that you were dishing out in rent every month will be kept by the landlord, leaving you empty-handed. Basically, this means that if you don’t end up buying the home, you’ll essentially be wasting your money.
Potential for the home to be worth less at the time of purchase. As stated earlier, you stand to benefit from a significant increase in property value if the housing market flourishes throughout the lease period. But if the opposite happens, the home could be worth less than what you agreed to buy it for. If you happened to sign a rent-to-own agreement when property values were at their peak, the price of the home could wind up being more than its value. In this case, you’d probably be better off walking away from the purchase option.
Potential to deal with a shady landlord. If you happen to sign a contract with a landlord who’s less than honest, you could end up with a mess on your hands. Shady landlords may beef up their fees, discourage you from having an inspection and appraisal done on the home, neglect the property, or may not even be the legal owner of the property on title. Be sure to look out for any red flags before you sign on the dotted line.
The Bottom Line
If you’re struggling to come up with a decent down payment for a home purchase or don’t have the credit score needed to secure a mortgage, you might have other options besides renting. Rent-to-own programs are designed to help people who desire to be homeowners but aren’t necessarily fully qualified to buy a home the traditional way just yet.
That said, there are also some potential risks to this type of program. Your best bet is to sit down with an experienced real estate agent to go over your financial situation and your options to see whether or not a rent-to-own is right for you.