Rent-to-Own Homes: How Do They Work and Are They a Good Idea?

You have your eyes set on homeownership. But houses these days are crazy expensive—so much that possibly trying to save for a down requital or apply for a mortgage has been a challenge .
At this point, choosing a rent-to-own home might sound like a good alternative. But rent-to-own programs are very hazardous. ( Spoiler alert : That ’ mho why we don ’ thyroxine recommend them. )
To help you make a smart decision on your homeownership travel, we ’ ll explain precisely how rent-to-own homes make and help you weigh the pros and cons. Plus, we ’ ll look into early ways to buy a home .

What Are Rent-to-Own Homes?

A rent-to-own home—also called a lease-to-own home—is a house you lease for a specific time period, then buy when your lease ends.

You ’ ll have to sign a contract agreeing to the duration of the lease, home price and other factors. ( We ’ ll grow to all that in a bit. ) The condense will besides say whether the seller has to put a delegate come of your rent money toward your equity—the part of the home you ’ ll own, as opposed to what you ’ ll owe .

How Does Rent-to-Own Work?

Lease-to-own programs are different than the typical home-buying process because they delay homeownership for those who aren ’ t ready to commit to a purchase—while allowing that prospective buyer to live in the family as a tenant in the meanwhile .

Find technical agents to help you buy your home .

We ’ ll explain the basic steps of how to rent to own a house. But inaugural, let ’ s be clear : We ’ re not recommending this. We precisely want you to know how it works so you can see how complicate these contracts can get—and why you should avoid them !

1. Negotiate a purchase price.

many rent-to-own agreements specify the purchase price improving front. The price could be based on the home ’ s current value—or a predict one. so if the seller thinks the house will be worth another $ 20,000 in five years, they ’ ll lock in that price immediately. .. and you ’ ll have to pay it, even if the house doesn ’ metric ton go up in rate .
When the price is predetermined like that, it ’ sulfur set in stone adenine soon as the buyer and seller sign the contract. But in other cases, the rent-to-own agreement says the buyer and seller can set the purchase price after the lease expires .

2. Determine if rent payments go toward the purchase.

One interview people constantly ask about rent-to-own homes is, “ Will my monthly payments be lower ? ” The answer is no !
Lease-to-own rent payments are typically higher than regular rent prices in the same area. That ’ randomness because most sellers set aside a percentage of your rend payment each calendar month as a credit toward your future leverage. Since they have to save that money for you—instead of putting it into their own pockets—they raise the rent to make up the difference .
even if your rent doesn ’ metric ton go toward the purchase price, rent-to-own homes are placid typically more expensive than renting a regular apartment because of the adjacent measure in the process .

3. Find out if you’re responsible for repairs and upkeep while renting.

In a rent-to-own agreement, the seller may ask you to cover costs such as repairs, alimony, homeowners association ( HOA ) fees and property taxes while you ’ rhenium rental. So you could find yourself on the hook for everything from landscaping to a pause air-cool unit .
That ’ mho why it ’ s so authoritative to walk through the contract with an lawyer who can intelligibly explain what each party is creditworthy for .

4. Agree on the term and type of lease-to-own contract.

You and the seller will agree to a specific rent term in the sign. That ’ s how long you ’ ll economic rent the home before buying it—usually anywhere from 1–3 years. That said, the term could be shorter or longer depending on your position .
You ’ ll besides both indigence to agree to the type of rent-to-own contract you want—either a lease-option agreement or a lease-purchase agreement ( more on those soon ) .

5. Pay a nonrefundable, up-front fee.

Okay, so you ’ ve agreed to a contract. now, you ’ re required to pay the seller a erstwhile, nonrefundable fee—also known as the option money, option tip or choice of consideration—to show the seller you ’ ve got skin in the game .
This seals your opportunity to buy the house, and in some cases, the seller will put this come toward your home fairness. You can expect to pay a share of the home ’ sulfur purchase price—typically 5 % or less—as your option fee .

6. Transition from renting to buying the home.

Unless you save up adequate cash to buy the house outright when your lease ends, you ’ ll need to get a mortgage .
At that bespeak, your mortgage lender will set a close up date when you ’ ll take possession of the property. Depending on the terms of the rent-to-own agreement, the lease money set aside for your buy ( and possibly the choice money ) will be credited to you as part of your down requital .
On the other hand, if you can ’ metric ton qualify for a mortgage, the option to purchase could expire .

Types of Lease-to-Own Programs

There are two main types of contracts when you ’ re getting a rent-to-own home. They both lay out the terms for renting the family during the lease phase, but they ’ re different when it comes to the buy phase .

  • Lease-option agreements – These contracts give you the option to purchase the home after the agreed-upon leasing period. .. but you don’t have to buy it. So if you might want to buy the home—but you’re not sure yet—the lease-option contract gives you an out in case you change your mind.
  • Lease-purchase agreements – These contracts legally obligate you to buy the house after your lease ends. There’s no backing out and no changing your mind—at least not without paying a lawyer thousands of dollars to get you out of the deal.

Is Rent-to-Own a Good Idea?

Rent-to-own programs may sound like a thoroughly idea to buyers who can ’ deoxythymidine monophosphate quite qualify for a mortgage yet but want to get their foundation in the door—literally !
The downside is rent-to-own homes come with big risks to consider. So let ’ s dig into the pros and cons .


1. You can avoid buyer competition.
At the end of the lease term, you won ’ metric ton have to compete against other buyers for the property if you have a rent-to-own agreement. And that ’ s a huge stand-in given how competitive the house market has been the last pair years !
2. Everything is negotiable.
Because the process of buying rent-to-own homes is less regulated than a typical buying or rental process, there ’ s no standard rent-to-own condense. The terms are completely negotiable .
If you ’ re entering into a rent-to-own program, you need to talk to a believe real estate agent and an lawyer on the battlefront end to make sure you understand—and are o with—the terms of your singular narrow .
3. You build a down payment over time.
alternatively of having to fork over a meaning down requital when you move in, you build equity over time by paying higher lease. That said, this is lone the begin of a down requital. It credibly won ’ thymine cover the full total.

For case, imagine you pay $ 1,500 a month, and the landlord puts $ 300 of that rent money toward your home buy for the next two years. That ’ s alone $ 7,200. And with median home prices over $ 400,000 these days, that ’ s less than 2 % down. 1 Yikes ! That ’ s not about adequate of a down payment. You need at least 10–20 % down, so you ’ five hundred good have a design to save for the rest !
4. You don’t have to qualify for a mortgage right away.
You may be drawn to a rent-to-own plan because you can ’ metric ton afford to buy a base even. possibly you ’ re still paying off debt or you don ’ t have a down payment saved. Those things can stop you from getting a mortgage. Moving into a house without qualifying for a mortgage first may seem like the answer .
But this “ pro ” is actually a reasonably boastful memorize. here ’ s the truth : Your rent-to-own agreement is way more probable to fall through if you ’ re already in a fiscal mess. If your site doesn ’ deoxythymidine monophosphate change drastically while you ’ re rent, you silent won ’ t be able to get a mortgage when your rent ends—putting you right back at square one .


1. Your rent will be more expensive.
When your contract is set up so that contribution of your rent goes toward home equity every calendar month, your rend prices will be higher. So basically, you ’ re stuck in a wedge save design where you feel pressured to buy a house at the end—ready or not .
Why not precisely rent a place for less money and set aside the money for a down payment in your own bank explanation rather of your landlord ’ south ?
2. You’ll pay extra for fees and repairs.
Remember, you ’ ll have to pay that up-front fee ( see total 5 above ) in arrange to have the option to purchase the home down the road. You won ’ thyroxine get that back if the deal doesn ’ thyroxine work away .
And don ’ t forget—you may be responsible for all repairs and sustenance even while renting. unexpected emergencies can put a serious hole in your pocket for a house that isn ’ t even yours however !
3. You could pay more than the home is worth.
The leverage price you lock in at the start of the rent-to-own contract is normally inflated to account for rising dwelling values. But if you lease for a couple years, you have no way of knowing what the real number estate of the realm market or local anesthetic economy could do during that time .
certain, your home value could go up, but it could besides drop. That means you could end up paying more than the place is actually worth !
4. You lose money if you decide not to purchase the house.
Let ’ s say you get a new job that requires you to relocate. possibly you still can ’ thymine qualify for a mortgage at the end of the lease term. Or possibly you just decide this sign of the zodiac isn ’ deoxythymidine monophosphate for you .
If you ’ re in a lease-option agreement, you can walk away from the contract. But what happens to all of the cash you forked over in higher rent and option money ? That ’ sulfur thousands of dollars you won ’ deoxythymidine monophosphate experience spinal column. And if you ’ re in a lease-purchase agreement, you ’ re equitable obviously ol ’ adhere .
5. Rent-to-own contracts favor the seller—not you.
With rent-to-own homes, the seller has most of the ability. They make money either way ( renting out or selling the house ), and they know most people who go for lease-to-own deals are in a close spot financially. So they give themselves lots of ways out of the distribute .
Something a modest as a late rend check or not paying for a rectify in a “ timely manner ” could release the landlord from any obligation to honor the condense. There won ’ triiodothyronine be a knight in shining armor headed your means to save the day—or your softwood .
6. You could lose the equity you build.
If the landlord ’ s fiscal position changes and the house goes into foreclosure, that house goes to the bank or mortgage lender—not to you .
Or if the seller just up and changes their mind, you ’ d have to take expensive legal action to enforce the sign. That ’ s a cost you may not be able ( or volition ) to pay .

Is Rent-to-Own Worth It?

When it comes to lease-to-own homes, the cons outweigh the pros. Rent-to-own agreements have direction besides many loopholes. They ’ re not a guarantee. Plus, you lose a short ton of money if the deal goes sour .
thus keep your money in your own bank account and guide clear of rent-to-own contracts—they ’ rhenium not worth it !

Alternatives to the Rent-to-Own Process

Rent-to-own may sound good in the short terminus, but it ’ s a large pile of sorrow in the farseeing ply. Trust us—it ’ mho worth it to buy a house the smart room, without a dazed rent-to-own agreement .
here ’ s what to do :

  • Keep renting. There’s no shame in renting while you pay down debt and save an emergency fund. In fact, that’s the best thing you can do!
  • Keep saving. After your finances are in order, start saving for a big down payment. Don’t buy a house—or sign an agreement to buy a house—when you’re broke!

We know cleaning up your fiscal batch and saving a down payment international relations and security network ’ deoxythymidine monophosphate easy. It takes unvoiced function and sacrifice. But it ’ s worth it !
You ’ ll hardened yourself up to pay off your house as fast as potential. And when you move into your new place, you ’ ll have peace of mind intentional you made a choice that will bless your family for years to come.

Find a Real Estate Expert

Buying a house the traditional direction may take more time, but you ’ ll be gladiolus you did. When you ’ re ready to buy, a good real estate agent can help you find a house you love that ’ south besides in your budget .
We recommend working with a RamseyTrusted real estate agent. They ’ re top-performing agents who ’ ve made the baseball swing and become function of our back local Providers ( ELP ) program—the fast, easy way to find an agent you can count on .
Find a RamseyTrusted ELP near you !

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Category : Finance

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