Are Rent-to-Own Homes a Legitimate Option for Buyers?

Rent-to-own is a relatively uncommon form of financing for a home, but one that more Americans who have been hesitant to buy a home in the past are now noticing. Though the latest data on the housing market shows property values have been falling and will likely continue to do so, as well as the fact that mortgage rates are repeatedly hitting rock bottom, there are a number of economic factors preventing people from buying.

It may appear to be the perfect time to purchase a home, but high unemployment, non-existent savings and poor credit are just a few of the concerns preventing potential homeowners from taking the plunge. Many cannot take advantage of current mortgage rates because of strict lending standards as well. That’s exactly why rent-to-own (also known as lease-option) properties are becoming so attractive.

What Is Rent-to-Own?

Rent-to-Own HomesJust as it sounds, rent-to-own refers to a payment agreement in which a renter eventually becomes the owner of an item. Rent-to-own agreements can apply to everything from big screen TVs to cars, or in this case, even houses.

When it comes to a rent-to-own home, the renter and seller agree upon a purchase price and then rent is paid each month with a portion of it going toward the eventual down payment. Generally, the rental payment is higher than a traditional rental agreement — for instance, a home that normally rents for $800 would instead go for $1,000 per month under a rent-to-own contract, and a predetermined portion of that would go toward the the down payment.

Depending on the terms of the contract, the buyer will either be required to purchase the home at the end of the lease period, or can decide whether or not to commit to buying. This is a very important term to have clear in the contract, as some buyers find they don’t even qualify to buy the home after the rent-to-own lease is up.

Upside to Renting-to-Own

There can be several benefits to opting for a rent-to-own contract instead of traditional financing:

Down payment made easy: You don’t have to save up for a down payment for years while renting an apartment before finally getting your first home. A lease option lets you save for your house while living in it.

Time to improve credit: When your rent-to-own term is up, you still have to finance the remainder of the purchase price. One of the biggest reasons buyers opt for a lease option in the first place is because their credit isn’t high enough to get a mortgage. Renting-to-own gives you time to improve your credit standing while getting into your home faster.

Decide if the home is right for you: Rather than committing to a property and neighborhood right off the bat, renting first allows you to get a feel for it all and really decide if you’re a fit.

The Danger of Rent-to-Own Homes

Rent-to-own homes might seem like an obvious choice for anyone struggling to buy a house, but they can also turn into a money pit–especially if the renter either decides not to purchase after all or simply can’t.

  • Higher rent: Whether you end up buying the home or not, you will be paying higher rent in the interim than anyone else renting out a comparable home. That may equate to thousands of dollars you could have saved for a bigger down payment while renting a normally-priced property.
  • Repairs and maintenance: Usually, when you rent, the landlord is financially responsible for any maintenance or repairs that must be made. However, a rent-to-own contract may require you handle these expenses yourself.
  • No investment protection: There are a number of scenarios in which you could lose all the money you’ve put toward a down payment. Whether you are unable to secure financing when the lease term is up, fall behind on payments and get evicted or just decide you don’t want to buy after all, you don’t get that extra money you’ve been paying back.

Rent-to-own is an option that works out well for some buyers, but keep in mind it could end up costing you a lot of money in the long run. More often than not, it is probably better to wait and buy a home when you can truly afford it, rather than gamble on your ability to purchase that home in the future. Of course, it all comes down to your reasoning behind choosing a lease option over traditional financing–just be sure you weigh your options carefully.

This is a guest post from the gang at GoBankingRates.com.

  • http://www.20sfinances.com 20′s Finances

    I would say that is not the ideal situation, but can be a great option for someone that is struggling that doesn’t want to wait. Then again, this housing market crash should illustrate the people should not buy a house too soon.

  • http://twitter.com/#!/FRBOClassified for rent by owner

    I do trust all the concepts you’ve offered in your post. They are really convincing and can definitely work. Nonetheless, the posts are very short for newbies. Could you please prolong them a little from next time? Thanks for the post.