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

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For a batch of people, buying a house is a dream come true. But homes these days are crazy expensive, and you might be feeling discouraged because saving for a devour payment or applying for a mortgage has been a challenge .
You might think choosing a rent-to-own base sounds like a good option to buying a house. But what is rent-to-own and how does rent-to-own influence ?
A rent-to-own home—sometimes called a lease-to-own home—is a house you rent for a limited fourth dimension, then buy when your lease ends.

To help you make a chic decisiveness on your homeownership travel, I ’ ll share precisely how rent-to-own works and help you weigh the pros and cons. Plus, I ‘ll look at early ways to buy a home plate. even in a crazy market, it is possible !

What Are Rent-to-Own Homes?

A rent-to-own home is a house you rent for a year—or maybe a few years—before you buy it.

Find adept agents to help you buy your home .

To live in a rent-to-own home, you ’ ll sign a sign agreeing to the length of the rent, home price and other factors. ( I ’ ll perplex to all that in a bite. ) The lease compress besides spells out if the landlord has to put a certain amount of your rent payments toward the purchase price of the home .

How Does Rent-to-Own Work?

Lease-to-own programs are different than the typical home-buying serve because they delay homeownership. so, if you ’ re not ready to commit to a purchase, you can live in the house as a tenant in the meanwhile .
I ’ ll get into the basic steps of how to rent to own a house. But beginning, I want to be crystal clear : I ’ thousand not recommending this ! I good want you to understand how it works thus you can see how complicate these contracts can be. .. and why you should avoid them at all costs !

Negotiate a purchase price.

Before you sign a rent-to-own contract, you ’ ll necessitate to agree on a purchase price. many rent-to-own agreements name the home purchase price up front. The price could be based on the dwelling ’ s current value or a bode one. If the seller thinks the house will be worth another $ 20,000 in five years, they ’ ll lock in that price now, and you ’ ll have to pay it. .. even if the house doesn ’ t go up in value. Yikes .
When the home value is predetermined like that, it ’ s determine in stone adenine soon as the buyer and seller sign the narrow. But in other cases, the rent-to-own agreement says the buyer and seller can set the purchase price after the lease expires .

Determine if rent payments go toward the purchase price.

You ’ ll motivation to negotiate whether any of your rent is applied to the star value of the home .
One question people constantly ask about rent-to-own homes is, “ Will my monthly payments be lower ? ” The answer is no !
In fact, lease-to-own rent payments are typically higher than regular lease prices in the like sphere. That ’ sulfur because most sellers set aside a percentage of your rend payment each calendar month as a credit rating toward your future leverage. Because they set that money aside for you—instead of putting it into their own pockets—they raise the rent to make up the difference .
If you ’ rhenium looking for rent-to-own homes with low monthly payments, wear ’ thymine get your hopes up .
evening if your rip doesn ’ t go toward the purchase price, rent-to-own homes normally cost more than renting a regular apartment because you might be stuck paying for care .
average price of rent vs. average price of rent-to-own

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

In rent-to-own agreements, the seller may require you to cover random costs like home repairs and care, homeowners association ( HOA ) fees and property taxes while you ’ rhenium lease. That means you could find yourself on the hook for everything from landscaping fees to repairing a broken air-condition unit. Ouch !
That ’ second why it ’ s so important to comb through the condense with a real estate lawyer who can clearly explain what each party is responsible for. not doing indeed could cost you big meter .

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

You and the seller will agree to a lease term in the condense. That ’ s how long you ’ ll rip the home before buying it—usually anywhere from 1–3 years. But the terminus could be shorter or longer depending on your site .
You ’ ll besides both 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 ) .

Pay a nonrefundable, up-front fee.

Okay, so you ’ ve agreed to a narrow. nowadays you ’ re required to pay the seller a erstwhile, nonrefundable fee—aka the option money, option fee or option of consideration—to show the seller you ’ ve got skin in the game .
This locks in your opportunity to buy the house. Sometimes the seller will put this amount toward your down requital. You can expect to pay a percentage of the home ’ randomness purchase price—typically 5 % or less—as your option tip. so, you ’ ll indigence to have some cash saved before entering into a rent-to-own agreement .

Transition from renting to buying the home.

Unless you save up adequate cash to buy the sign of the zodiac outright when your rent ends, you ’ ll need to get a mortgage when it ’ randomness prison term to buy the place .
At that point, your mortgage lender will set a closure date when you ’ ll take possession of the property. Depending on the terms of the rent-to-own agreement, the rent money set aside for your leverage ( and possibly the option money ) will be credited to you as part of your down payment.

But—plot twist—if you don ’ deoxythymidine monophosphate qualify for a mortgage, the option to buy the home could expire .

Read your contract carefully and get a home inspection.

Before signing a contract, make certain the terms are good. Read the fine print besides. It ’ s a good idea to have an lawyer or a real estate of the realm pro expect at the contract .
besides, research the home to make indisputable the agreed-upon price international relations and security network ’ t more than the house is worth. It ’ s a beneficial idea to get a home inspection and an appraisal to save you any surprises once it comes time to buy the firm .

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 house during the rent phase, but they ’ re different when it comes to the buying part. Let ’ s take a count at lease-option agreements versus lease-purchase agreements .

  • 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 100% sure yet, the lease-option contract gives you an out if 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 might sound like a adept idea to buyers who don ’ thymine qualify for a mortgage so far but want to get their foot in the door—literally !
The downside is rent-to-own homes come with bad risks to consider. Let ’ s dig into some of those pros and cons .

Pros and Cons of Renting to Own

I ’ megabyte going to start with the pros of renting to own, but spoiler alert : The cons decidedly outweigh the professional !


You can avoid buyer competition. At the end of the lease condition, you won ’ deoxythymidine monophosphate have to compete against other buyers for the property if you have a rent-to-own agreement. And that ’ s a huge relief given how competitive the house market has been the survive couple years !

  • 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 contract. The terms are completely negotiable. If you’re entering into a rent-to-own program, you need to talk to a trusted real estate agent and an attorney on the front end to make sure you understand—and are okay with—the terms of your unique contract.
  • You build a down payment over time. Instead of forking over a significant down payment when you move in, you build equity over time by paying higher rent. That said, this is only the beginning of a down payment. It probably won’t cover the full amount. For example, imagine you pay $1,500 a month in rent, and the landlord puts $300 of that payment toward your home purchase for the next two years. That’s only $7,200. With median home prices over $400,000 these days, that’s less than 2% down.1 Oof! That’s not nearly enough of a down payment. You need at least 5% down if you’re a first-time home buyer or 10–20% down if this isn’t your first time buying a home. So, you’ll need a plan to save for the rest!
  • You don’t have to qualify for a mortgage right away. You could be drawn to a rent-to-own program because you can’t afford to buy a home just yet. Maybe you’re still paying off debt or you don’t have a down payment saved. Those are totally valid reasons to hold off on getting a mortgage. And moving into a house without qualifying for a mortgage first might seem like the perfect solution. You can have your cake and eat it too—or can you?This “pro” is actually a pretty big con. Here’s why: Your rent-to-own agreement is way more likely to fall through if you’re already in a financial mess. If your money situation doesn’t change drastically while you’re renting, you still won’t be able to get a mortgage when your lease ends—putting you right back at square one.


Your lease will be more expensive. When your sign is set up so function of your rent goes toward home equity every calendar month, your rent will be higher. You ’ re basically stuck in a forced salvage plan where you feel pressured to buy a house at the end—whether you ’ re ready or not. Why not merely rent a place for less money and set aside savings for a down payment in your own bank account alternatively of your landlord ’ second ?

  • You’ll pay extra for fees and repairs. Remember, you’ll have to pay that up-front fee (see above) for the option to purchase the home down the road. But if the deal doesn’t work out, you won’t get that payment back. And don’t forget—you may be responsible for all repairs and upkeep even while renting. Unexpected emergencies can burn a serious hole in your pocket for a house that doesn’t even belong to you!
  • You could pay more than the home is worth. The purchase price you lock in at the start of the rent-to-own contract is usually inflated to cover rising home values. But if you lease for a couple years, you have no way of knowing what the real estate market or local economy could do during that time. Sure, your home value could go up, but it could also drop. That means you could end up paying more than the property is actually worth. Or if you’re getting a mortgage, the bank might not lend you money on a house with a low appraisal.
  • You lose money if you decide not to purchase the house. Let’s say you get a new job that requires you to relocate. Maybe you still can’t qualify for a mortgage at the end of the lease term. Or maybe you just decide this house isn’t for you. If you’re in a lease-option agreement, you can walk away from the contract. But what happens to all the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back. (Cringe.) And if you’re in a lease-purchase agreement, you’re just plain ol’ stuck.
  • Rent-to-own contracts favor the seller—not you. With rent-to-own homes, the seller has most of the power. They make money either way—either by renting out or selling the house—and they know most people who go for lease-to-own deals are in a tight spot financially. So they give themselves lots of ways out of the deal. Something as small as a late rent check or not paying for a repair in a “timely manner” could free the landlord from any obligation to honor the contract. And there won’t be a knight in shining armor headed your way to save the day—or your deal.
  • You could lose the down payment you build. If the landlord’s financial situation changes and the house goes into foreclosure, the house suddenly belongs to the bank or mortgage lender—not you. Or the seller could just up and change their mind. In that case, you’d have to take expensive legal action to enforce the contract. That’s a cost you might not be able (or willing) to pay. I don’t want to scare you, but these are realities.

Is Rent-to-Own Worth It?

When it comes to lease-to-own homes, the cons outweigh the pros. Rent-to-own agreements have way excessively many loopholes. They ’ re not a undertake. Plus, you ’ ll lose a long ton of money if the batch goes sourness .
therefore keep your money in your own bank account and tip clean of rent-to-own contracts. They ’ re not worth it !
Some people might tell you to rent-to-own because you can live in a firm while you get your finances in order, but the truth is, you ’ ll be much better off barely renting and skipping the “ to own ” separate of the equality .

Alternatives to the Rent-to-Own Process

Rent-to-own might sound adept in the unretentive term, but it can turn into a big batch of repent in the long ply. Trust me—it ’ s worth it to wait so you can buy a house the wise way, without a bad 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!

I know cleaning up your finances and saving a down requital international relations and security network ’ triiodothyronine easy. It takes hard work and solitaire. But it ’ randomness worth it !
If you do it, you ’ ll set yourself up to pay off your theater as debauched as possible. And when you move into your modern place, you ’ ll have peace of mind knowing you made a option that will bless your family for years to come .

Find a Real Estate Expert

Buying a house the traditional way may take more time—in fact, it credibly will—but you ’ ll be glad you put in the hard work and patience. When you ’ re fix to buy, a good real estate agent can help you find a house you ’ ll love that ’ s besides in your budget .
I recommend working with a RamseyTrusted real estate of the realm agent. They ’ ra top-performing agents who ’ ve made the cut and become part of our second local Providers ( ELP ) program—the fast, easy way to find an agent you can count on. ­­­ Find a RamseyTrusted ELP near you !

Frequently Asked Questions

What’s the difference between rent-to-own and owning?

The main remainder between rent-to-own and owning a house is that rent-to-own gives buyers the choice of testing out the property before buying it. It besides gives buyers the ability to lock in the house they want before they can afford it.

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The downside is that rent-to-own is riskier and can be more expensive than owning because you ’ ll wage extra rend that goes toward a gloomy requital on the firm. And if something happens in the future to break your agreement, you won ’ metric ton get all those extra lease payments back. Plus, you might not be able to rely on your landlord to handle the repairs and alimony. Save yourself the headache and choose traditional homeownership rather of rent-to-own .

How does rent-to-own work with bad credit?

Buyers with bad credit might consider a rent-to-own agreement because it allows them to get into a home leverage sign even if they can ’ thymine qualify for a mortgage. Doing rent-to-own gives buyers the opportunity to build a steady payment history and pay supernumerary economic rent that ( if all goes good ) will be set aside as a future down payment—both of which could help them finally qualify for a mortgage .
But if you have regretful credit, entering a rent-to-own agreement—where the extra rip you pay toward a toss off payment is out of your see and where you could be responsible for goodly care costs—could put you one missed requital away from bankruptcy .

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