A Quick History of Rentals

Rent-to-Own: How and When Does It Work?

An alternative method of buying a home is a rent-to-own agreement, also known as a 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 can be a perfect option for those who would like to own a home yet are not qualified for a mortgage, or those who are hardly prepared for the demands of ownership. Say you have a bad credit score, but this is only because of temporary issues that are now behind you, and you have been doing fairly and consistently rebuilding your credit ever since. Maybe you a have high debt-to-income ratio, though not by much, and you can afford to make additional payments and bring down your debt considerably within the next two or three 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. In the same manner, you might be successfully self-employed, but lenders are not that confident about your track record. Or probably you have actually started saving, but you still don’t have enough to make the usual 20% down payment on a home.

If any of the above applies to you, then your best option might be to enter a rent-to-own agreement. You can lock down a house that you like now while you improve your credit score, extend your employment or business background, add to your savings or do whatever other things that will increase your chances of getting a mortgage. And, should the option money or a portion of the rent approach the purchase price, you can also begin to build some equity.

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A rent-to-own agreement works when potential buyers are absolutely sure about being able to buy the house upon the lease term’s expiration. If the chances of you moving and not purchasing the house are good, be careful. It’s improbable that a landlord or owner will want to refund rent credit and the option fee so you can have the flexibility to move.

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 fully prepared, you can pick any house on the market that aligns with your needs, aesthetics and budget.

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