The Mechanics and Benefits of a Rent-to-Own Agreement
A common option to purchasing a home is referred to as a rent-to-own (lease or lease-to-own) agreement. A buyer who goes into a contract like this agrees to pay the rent for a particular property within a preset duration, before deciding whether they want to purchase it on or prior to the expiration of the lease.
A rent-to-own agreement may is usually perfect for people who want to own a home but have not secured a mortgage, or those who are not yet ready for the commitment that ownership requires. For example, you have a bad credit score but the factors that brought you to this position are now behind you, and you have been steadily working on getting your credit act together. Perhaps your debt-to-income ratio is excessively high, but not by a lot, and your budget can accommodate extra payments and decreasing your debt substantially over the next few years.
You may have a job that pays really well, or landed a new job where the salary is higher, but because you’ve only been there less than a year, your lender does not consider your income stable enough. Likewise, you may be successfully self-employed, but lenders think your track record is not enough to make them comfortable. Or you might have begun saving, but you haven’t saved enough to make the typical 20% down payment on a house.
If your situation resembles any of the above, then a rent-to-own agreement may just be your best bet. You can lock down a house you like for a period of time, and in the meantime increase your odds of getting a mortgage by improving your credit score, saving more money, and doing whatever else it takes to achieve your goal. And, in case the option money or percentage of the rent comes close to purchase price, you can start to build some equity at the same time.
To make a rent-to-own agreement work, potential buyers have to be sure that they are prepared to make the purchase as soon as the lease expires. If the chances of you moving and not purchasing the house are good, be careful. It’s highly improbable for an owner or landlord to agree to a refund of the rent credit and the option fee to give you that flexibility of moving.
If you see even the slimmest chance of you not qualifying for a mortgage or any other financing before the lease expires, you should probably just keep renting, fixing your credit, and saving up for a down payment. And when you’re ready, you can choose any home on the market that fits your taste, needs and price range.