Rent to Own: How It Works And Whether It's Right for You

Not ready yet to qualify for a home loan? Rent-to-own offers an option to help you save up your money and get ready for the responsibilities of homeownership.

Like many hopeful homebuyers, you may have watched rising home prices and rising interest rates with a wary eye, wondering whether you’d ever be able to find and afford the home of your dreams. If you need some more time to put together the funds for a home purchase or to qualify for a home loan, it’s a good idea to consider a rent to own purchase process. You may be wondering: How does rent to own work? Is it the right option for me?

How does the rent-to-own process work?

While there are different types of rent-to-own scenarios, in general, the process involves a lease agreement with an option to buy at the end of the lease term. You will generally pay an upfront deposit, then a portion of your monthly rental will be added to that deposit, giving you the ability to put together a down payment to apply toward the purchase of the home at the end of the lease.

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If you reach the end of the lease agreement and are unable to secure financing and purchase the home, or if you decide that you don’t like the home and don’t want to continue with the purchase, you will generally walk away with nothing to show from the money you’ve set aside. Some agreements may grant you a portion of the money that’s set aside, using the rest of the money to prepare the house for a new renter or buyer.

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Keep in mind, there is a difference between a lease option and a lease-purchase contract. The lease option gives you the right to buy at the end of the lease term while the lease purchase makes your purchase a requirement — even if you’ve changed your mind. Make sure that you carefully consider the terms of the contract and your future plans before you sign.

What's the difference between rent to own and a mortgage?

With a mortgage, you technically own the home as long as you make your payments on time. With rent-to-own, the title-holder is the owner and you are a renter, even though you are working toward owning the property. Your payments are made to the homeowners when you rent-to-own, rather than to the bank or mortgage company.

Pros and cons of rent-to-own homes

Rent-to-own can be a great option for those who are not in a financial position to purchase right away. Here are some of the pros and cons of this purchase process:

Pros

Allows you to improve your financial situation

Whether you need to improve your credit score or gain more employment experience in order to qualify for a mortgage, a rent-to-own agreement gives you some extra time to get your financial house in order, helping you to qualify for a mortgage and, possibly, for lower interest rates as well.

Helps you to save for a down payment

If you haven’t yet saved enough for a down payment, the “forced savings” aspect of a rent-to-own purchase helps to make saving part of your monthly routine and allows you to put aside more than you might otherwise.

Can work well for those who are not yet ready to purchase

Maybe you’ve experienced the unexpected, like a divorce, job change, or another occurrence that changed your financial picture. Rent-to-own can give you time to get back on your feet and smooth the way to homeownership.

Can help you to save on upfront repair costs

Your rent-to-own agreement usually offers the ability to split repair costs or for the owner to cover major expenses while you cover cosmetic repairs or optional updates. That way if something goes badly wrong during the first year or two of your occupancy, you won’t be the one paying out of pocket.

Can give you added peace of mind before you purchase

By allowing you to live in the home you want to buy, you are making a more informed decision and ensuring that the home you’ve chosen is truly the right one for you and your family.

Can help you lock in a purchase price in an appreciating market

If home prices are on the rise, you may be able to lock in a purchase price upfront. That could turn out to be quite a bargain if home values in your area end up surpassing the price you’ve agreed upon.

Cons

While rent-to-own offers a number of advantages, it’s not for everyone. Here are some possible drawbacks.

Can be risky if you don’t think you’ll qualify for a mortgage

If you haven’t made a plan for improving your financial situation, or if you experience an unexpected financial or employment setback, you may find yourself unable to qualify for a mortgage and unable to follow through with the purchase. That could mean the loss of the money you’ve had set aside for your down payment.

Can be risky if you decide to walk away without buying

If you get into the home and decide that it’s just not the right one for you, walking away won’t be as easy as ending a lease. You could end up leaving a fair amount of money on the table, including both your initial deposit and monthly set-aside.

Is rent to own a good idea for me?

While rent to own may not be the path to homeownership for everyone, it can be a great option if you have a fair idea of where you want to live and a reasonable expectation that you’ll be able to qualify for a mortgage at the end of your lease term. Want to get started? Talk to a qualified lender to find out what it will take to get you financially ready and what steps you need to complete in order to make sure you’re approved for a home loan when the time comes.

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