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Rent-to-Own Homes: Complete Guide Feature Image
Posted on February 2, 2022 6 minute read

Rent-to-Own Homes: Complete Guide


What's in this article?

What is a Rent-To-Own Home?
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Rent-To-Own-Contracts
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Benefits of Rent-To-Own
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The difference between rent-to-own and buying a home?
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How to find a Rent-To-Own Home — Homefinity Can Guide You
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Rent-to-own is another, less traveled path to home ownership. 

It’s a good option for a select group of consumers that include people who can’t secure a mortgage because of a low credit score.

Rent-to-own, also called lease-to-own-home, allows these folks to both put money toward the purchase of the home and rebuild their credit score so that an affordable mortgage can be secured. 

In other cases, a new home buyer can simply “test drive” the house before committing to buy it. Rent-to-own allows consumers to check out the neighborhood, the school district, and the actual home before entering into a long-term commitment. 

Buyers who choose the rent-to-own route must take the same precautions and steps to protect themselves. That includes hiring a home inspector to ensure the property doesn’t have any major defects, and dealing with insurance agents and tax experts.  

Let’s dive deeper into rent-to-own homes and how Homefinity can guide you through the process of finding one. 

What is a Rent-To-Own Home?

A rent-to-own home is an agreement between the landlord and the renter that gives the renter the option to buy the home when the lease expires.

The details that must be negotiated between the landlord and the buyer include: 

  • Length of lease — Usually no longer than five years, and often three or less. 
  • Amount of downpayment — A percentage of the agreed-upon purchase price.
  • Rent amount — The amount that goes to the landlord to live in the home.
  • The option deposit — The amount on top of the rent that goes towards the price of the house. This is added to the down payment or purchase price at the end of the lease. 
  • Who is responsible for maintenance, repairs, insurance, and taxes? —These typically fall to the renter.
  • Purchase price — The amount both parties agree the home will be sold for at the end of the lease. The amount is a prediction of the value of the property at the end of the lease, so it will probably be more than average current prices. 

It’s highly recommended for the buyer to go over the contract with an attorney to ensure they know exactly what they’re getting into. Remember, it’s all negotiable. 

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Rent-To-Own-Contracts

The two different kinds of rent-to-own contracts are lease-option and lease-purchase.

Lease-Option

This gives the renter the option to buy the home after the lease if up. If the buyer does not want to or can’t buy the home, the lease-option gives them the choice to either buy it or walk away. 

This option is good for people looking to buy in fluctuating markets since the final purchase price is defined in the lease. If the market falls, it may not make financial sense to purchase at the negotiated price. Walking away might be a better option.

Lease-Purchase

This requires the lease holder to buy the home at the end of the lease. The buyer cannot choose to walk away. Not for people who wish to “test-drive” homes. 

If the buyer decides to not purchase the home in either case, then they forfeit their downpayment and the option deposit. This is one of the risks for rent-to-own consumers. 

No matter the kind of lease a buyer chooses, they must secure financing before the end of the lease in order to pay the seller in full. 

Benefits of Rent-To-Own

Rent-to-own is ideal for folks who want to become homeowners but need to repair their credit score to secure an affordable mortgage loan. 

Just entering into a rent-to-own contract with the seller and making timely payments is enough to build credit scores and fabricate trust with the seller.

They’re also good for people who need to move in immediately and don’t have the time to wait the month or two it takes to close on a newly purchased home. 

And if you’re not quite ready to buy — need time to save up, just started out in your career, etc.  — but want to lock-in the price of a home in a hot home market. 

The difference between rent-to-own and buying a home?

Buying a home is more straightforward.

Ideally, buyers will save their money for a downpayment, have a good enough credit score to get pre-approved for a mortgage, find a home, make an offer on the home, get the home inspected and appraised, close the deal and then move in. Simple, right?   

Think of rent-to-own as a hybrid of the two. Instead of entering an agreement with a lending institution, the contract is with the landlord, whether that’s an individual or a rental company. There’s some risk here. 

If the landlord runs into financial trouble and the home is foreclosed upon, the buyer may have to seek legal counsel and attempting to recover their down payment and option deposit, for example. 

How to find a Rent-To-Own Home — Homefinity Can Guide You

The Internet has many portals to search for rent-to-own homes across the country, but often people find these properties through their network of friends or by taking initiative themselves and contacting individual sellers.

Who knows, maybe the landlord is tired of being a landlord and is looking to sell the house? It never hurts to ask. 

A real estate agent can also be the best guide through this jungle. They simply have the knowledge, experience, and connections that are vital to all buyers. 

Regardless of the route a buyer takes, Homefinity’s purpose is to ensure the experience is smooth and transparent. 

We have the resources to guide consumers through all the gates that come with purchasing a new home. There are many options available to buyers, and Homefinity has the answers to your questions.

Contact Homefinity today! 

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

Photo by RODNAE Productions from Pexels