Rent-To-Own Homes 101

You have spotted the house of your dreams, and it is on the market – but you cannot afford to buy it at the moment. Perhaps you do not have enough down payment funds, or your credit score is not good enough to get a mortgage loan. Don't give up yet. You have one other possibility to consider – a rent-to-own contract.

In a rent-to-own arrangement, the potential buyer agrees to rent the home for a given period (typically 1-3 years). At the end of the rental period, the renter will either have the option to buy the house or be obligated to do so, depending on the terms of the agreement.

To retain the option to buy the house, a renter puts up a payment (option money) which can range anywhere from 2.5%-7% of the sale price of the home. This gives the renter the right to buy, but not the obligation to do so. Meanwhile, the current homeowner/landlord agrees not to sell to any other potential buyers during this time. Option money may be refundable (usually not) or partially applied toward the eventual purchase price (usually so).

Why would you want to rent-to-own? Here are a few potential reasons.

• Finding the Perfect Home – If you find the perfect home but cannot afford to buy it, the rent-to-own relationship gives you time to gather the needed down money or repaired credit score to qualify for a mortgage. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
   
• Quick Relocation – If you need to relocate for a job transfer or other involuntary reason with limited time, a rent-to-own can let you take advantage of the best fit you can find in a short timeframe without locking into a 30-year mortgage. Another example would be a move into a more desirable neighborhood or school district for your children. You have to weigh the advantages of rent-to-own over a straight rental.
   
• Inability to Get a Traditional Mortgage – Poor credit, previous foreclosures, or other historical problems that still count against you on mortgage applications may make rent-to-own a superior option. This does assume that the problems have been rectified, and that your current income allows you to make your rental payments.

Unfortunately, there are also some downsides to consider.

• Expense – Renting-to-own is more expensive than a straight rental. Your rent will be higher as a premium to the current homeowner to accept the rent-to-own arrangement. You will generally receive a portion of your rental payments back as credit on the purchase price, but in the short term, the expense is greater.

In essence, there is no point in renting-to-own a house if you do not reasonably expect to buy it.

• Risk – If you choose not to buy, you will lose any non-refundable option money as well as any credit you had built up toward the purchase of the home.
   
• Overextension – Beware of overestimating your ability to pay rent and still save up enough funds to buy the house at the end of the term. Make sure you have sufficient fiscal discipline to make this work for you.

Before executing a rent-to-own agreement, have a real estate lawyer look over the terms before you buy. Clarify any ambiguities on expected maintenance and upkeep, payment terms and conditions, and expectations and obligations at the end of the term.

Rent-to-own housing arrangements work well for some people, but they are not for everybody. Consider whether a straight rental is better while you save money for a future home purchase, and before you decide that a rent-to-own is best for you, make sure that you fully understand all of your obligations and options.

MoneyTips is happy to help you get free refinance quotes from top lenders.

This article was provided by our partners at moneytips.com.

For more from MoneyTips:
Home Buying vs. Renting - Which Strategy Makes More Sense for You?
Check Your Credit Score for Free
Where Can Millennials Afford to Live?