All about rent-to-own
What are rent-to-own homes? How does the process work?
Many renters begin their journey with the intention of one day owning a home. For some, that includes partaking in a process where you rent-to-own the home you live in.
But, what exactly is a rent-to-own home? How does a person start this process?
In this article, we're talking all about rent-to-own homes and how they work. Let's get started!
1. What are rent-to-own homes?
Rent-to-own homes are those with leases that include either an option to buy or a requirement to buy after a certain period.
The rental payments include both rent and funds that contribute to a future down payment.
It can help you build up your credit score and save for a down payment on the property all at once.
2. How do renters find rent-to-own homes?
Rent-to-own home listings aren’t as common as either rental or sale listings. They often happen under very specific circumstances, such as:
- If a home buyer sees that a home has been on the market for a long time, they may approach the seller with a rent-to-own offer.
- When a property owner has had a home on the market for a while but is having trouble selling it, they may list it as a rental with an option to rent to own.
- If a tenant is happy in their rental home, but the landlord wants to sell it, the tenant may ask to have a rent to own arrangement
If you're interested in renting-to-owning your home, you should ask your landlord if they’re open to discussing a change in your relationship with a rent-to-own agreement.
3. How does the rent-to-own process work?
There are several steps every renter has to go through before they own the home they're renting. These include:
Signing a specific lease or purchase agreement
You can either sign a lease agreement with an option to purchase. This contract gives you the right—but not the obligation—to buy the home at the end of your lease. If you decide not to go through with the purchase, the option expires, and you can walk away.
You can also sign a lease agreement with a purchase agreement. With this type of agreement, you could be legally obligated to buy the home at the end of the lease.
This type of contract will have you wanting to be extra sure to have a home inspection done to make sure there are no sure no surprise expenses that come up once you become the owner. You may also want to get pre-approved for a mortgage to be sure you’ll qualify for one when you need to.
Setting a purchase price
The home’s purchase price will be set upfront. You’ll negotiate with the landlord on the price.
Traditionally, home buyers rely on real estate agents to help negotiate home prices, but agents are rarely involved with transactions for rent to own homes.
That’s because there’s little to no way for them to get paid until the home sells, which is often years in the future. Without an agent, it’s smart to do research on comparable home sales before talking about prices with the landlord.
Paying an option fee
You’ll also pay an “option fee” when renting a rent-to-own home. This is also negotiable but is usually about 1% (but can be as high as 5%) of the purchase price- upfront.
It is a one-time, non-refundable fee that gives you the option to buy the home at an agreed-upon price in the future. The option fee will be applied to the home’s purchase.
Deciding the length of the rental lease agreement.
At the end of the rental portion of your contract, your goal will be to be in a good financial purchase of the home.
The rental agreement typically lasts one to three years. How long you want yours to be will depend on how long you think you need to get your finances ready to qualify for a mortgage.
Signing a rental agreement that covers rent and down payments
To get into a rent-to-own home, you sign a rental agreement and also a document that outlines how you plan to purchase the house.
The amount you pay can be negotiated, but you generally agree to pay something that’s above-market rent. That extra portion—typically 25% to 30% of the monthly payment—goes toward the eventual property purchase.
Think of it as a way to save for a down payment. Of course, you can always save more on your own, too.
Apply for a mortgage near the end of your rental agreement
When it’s time for you to purchase your home, you’ll apply for a mortgage just like any other home buyer. Shop around for the best mortgage lender and type for you and apply. With any luck, you’ll be on your way to homeownership!
We hope you now understand how rent-to-own homes work!
If you or anyone you know is looking to move into a new place, you should give us a look. Lighthouse gives cash back to renters who sign a new lease. It's an easy way to save on rent (especially in this unaffordable market). You can check us out here!