What Are Rent-to-Own Homes?

06.09.2022 | Category: Homebuying

Owning a home entails getting a mortgage, which requires a good credit score and enough cash for the down payment. But what if you want to try an alternative route to traditional home loans?

One option you can look into is the rent-to-own agreement. This agreement allows you to rent a property for a specific period of time and then buy it before your lease expires.

Below, we’ll explain how this method works, its advantages and disadvantages, and how to find excellent deals in your area. Let's dive in.

How Do Rent-to-Own Homes Work?

Before you start searching for "rent-to-own homes near me" online, it’s best to take a look at the particulars of this option.

Renting-to-own means committing to rent a property, usually for a few years, with the option to buy it before your lease contract runs out. A portion of your monthly payment goes toward a down payment on the home. You can use the accrued amount should you decide to purchase the property later.

There are two types of contracts in a rent-to-own agreement, both of which may require you to pay a 2 to 7 percent option fee:

Lease-option contracts offer you the right to purchase the rented property before or after your lease period. This agreement prohibits the owner from selling the home to anyone else. Once the lease expires, you can proceed with the purchase or forgo it
Meanwhile, lease-purchase contracts require you to buy the property. Here, the owner gives you the exclusive rights to purchase it at a price you both agree on at the beginning of the lease. Note that you have to secure a mortgage before the term ends to avoid forfeiture of the option fee and down payment

Pros and Cons of Rent-to-Own Homes

Renting a home with the expressed intent to buy it at some point gives you time to gather funds. At the same time, a portion of your rent payment goes toward homeownership, so it's an expense some people are happy to have.

However, this option also has its disadvantages, such as losing your money if you forfeit your right to buy the property at the end of your lease.

This section looks at the pros and cons of renting-to-own to help you determine if this is the right decision for you:

Pros of Rent-to-Own Homes

1. Save Money While Working Toward Your Goal

As mentioned, renting-to-own allows a portion of your rent payment to go toward your future down payment. This setup will enable you to save money while renting, which is typically a 100 percent expense. But do note that tenants under a lease-option or lease-purchase contract pay a monthly lease at a higher amount than the fair market value. Still, you get to use some of the money to buy the property later.

On top of that, renting your potential future home is like a trial run. You get to experience what it's like living in the house and decide whether you want it.

2. Split Repair Costs

Repairs can be classified as small and large. That tells you something about the amount needed to facilitate fixes. Fortunately, deals usually split the repair responsibilities between the tenant and the landlord. But, of course, the latter pays for the large repairs.

3. Transition Into Homeownership When Your Lease Expires

After getting first-hand experience living in what could be your future home, you can opt to buy the property or move forward elsewhere. If you push through with the purchase, you may be eligible for a home loan from a mortgage lender. The money you could accrue for paying the house down will now go to your lender.

Cons of Rent-to-Own Homes

1. Lose Out Money if You End Up Not Buying the Property

If you enter a lease-purchase agreement, you are required to buy the property within or at the end of your term. Changing your mind about buying means losing the money since the rent payment and option fee, if included, are non-refundable. You may want to consider the decision carefully since you could pay more than what you would normally do while renting.

2. No Guarantee of Qualifying for a Home Loan in the Future

Another drawback of renting-to-own is the possibility of failure to qualify for a home loan at a later date. We are not saying that you won't be able to get it. Actually, you have the option here to grow your income without the long-term responsibility of homeownership yet. You can make sure you're ready to buy a home and qualify for a loan as your lease nears expiration. But there is no guarantee that all of this will happen just because you have opted to go the rent-to-own route.

How to Find Rent-to-Own Homes Near Me

So now you know the difference between a lease-option and lease-purchase agreement and whether or not the pros of renting-to-own outweigh the cons.

What's next?

Following this, it's time to check your prospects and dip your feet in the market. Here are some ways you can find potential homes to rent with the intent to buy later:

Find an experienced agent. Look for a real estate agent with a proven track record in this area – someone who knows how this works. You need them to advocate for you and ensure you understand the terms and conditions of the contract.
Partner with an investment firm. Brokerage firms usually buy properties in desirable areas and repackage them as rent-to-own homes. This kind of program cushions the risk that comes with directly entering into an agreement with the owner. However, it may also entail paying for more, including the value-adding service.
Contact the seller directly. A house that has been sitting on the market for a long time is a good target. The seller may want to close a deal soon and be open to the rent-to-own scheme.
Search via listing sites and platforms. Just like traditional home buying, renting-to-own has its own dedicated platforms. Zillow, Avail and Apartments.com are just a few examples
Tap into your network. Ask around and see if there's someone in your network who is selling their property and willing to transition into a rent-to-own contract

Evaluate Your Financial Capacity with Free Tools Like a Mortgage Calculator

It's also never too early to search for a "mortgage lender near me". If you're unsure about renting-to-own, you might want to know if you are pre-qualified for a home loan or at least get a hold of the list of requirements. You might also want to check if you can afford a home now or still need a bit more time to prepare.

In any case, try our mortgage calculator to assess your capacity at this point:

Rent-to-Own: One Way to Move Forward

Consider the renting-to-own approach if you've been hesitant to buy a house the traditional way. This option allows you to save money and test-drive the property before committing 100 percent to homeownership. Again, remember to weigh the pros and cons carefully before diving in.

When you're ready to take the leap and buy the property, make sure to partner with an experienced mortgage lender like Mutual of Omaha Mortgage. We are more than just a result for your "mortgage lender near me" search. Our team of loan and underwriting experts will take the time to understand your needs and preferences and assist you in finding the right mortgage product. It's our ultimate goal to give you the best option at a competitive interest rate, aligning the solution with your long-term plan.

Your pursuit for a better quality of life and peace of mind -- that's what matters to us.

Buy your home today with a team who cares! Contact us to discuss the details of how we can help you.