Rent-to-Own: You Are Ready, But Your Finances Are Not, Yet

So you love the area you live in and know you will be sticking around for awhile. You are a renter and want to own, but don’t have a down payment saved, your credit is low, your debt to income ratio is unfavorable, or some other factor is limiting you from purchasing a home at this time. A rent-to-own agreement may be a good solution for you.

In this type of agreement, generally, you agree to a sales price now, put some money down and pay a little higher each month above market rent that goes toward the purchase price when your option-to-buy matures. I say generally, because like all property agreements, there is so much flexibility and variability in what an agreement can look like, as long it is within the law two parties can put many different terms, options, contingencies, fees, etc. into this agreement.

A rent-to-own deal offers prospective buyers an opportunity to settle into a home while they obtain the financing needed to purchase the home. These agreements typically range from 1 to 3 years for the lease period. If you are in an appreciating market, then locking in today’s price would be beneficial to you when purchasing the house allowing you to purchase a house you may not have afforded at the time.

Typically, the down payment and the monthly credit toward the down payment are forfeited at the end of the lease period if you do not exercise your option to buy. This money is seen as the money paid to have that option-to-buy, but if you buy then typically it is put toward your down payment. It is helpful to discuss the rent-to-own agreement with a lender, as some lenders may look at the rent credit as a seller concession and won’t include it in the down payment. You also want to think about what happens if the property goes up or down in value, the agreement can have a contingency that addresses this, as specifically if the price goes down and the property doesn’t appraise at the purchase price you set, then you may not want the property or can’t afford the extra payment needed. It is highly recommended to have an attorney look over the agreement and advise you.

If you have been through a rent-to-own as the buyer or seller, or have comments on it, please write. If you want more information about this type of agreement and what is possible, please contact me.

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