January 19, 2016
Is Renting-to-Own Smart?
What You Should Know About Rent-To Own Homes
Rent-to-Own homes, also called lease-option or lease-to-own homes, offer a way for people who don’t yet qualify for a mortgage or who aren’t quite ready for the commitment of ownership, to occupy a home. They do so for a year or two or three, with the option to purchase at the end of that term. It’s not a common way to purchase a property, and the selection of rent-to-own properties is tiny compared to the selection of properties available purely for lease or sale. In addition, rent-to-own contracts tend to favor the owner/landlord and can put renters at a disadvantage.
Still, some people manage the process successfully. Let’s walk through the circumstances that can make renting to own a home a good idea.
Mortgage Within Reach
What does it mean to be close to qualifying for a mortgage? You might have a bad credit score– one that’s below 620, the bare minimum some lenders will accept – but the circumstances that depleted that score are behind you and you’ve been steadily improving it ever since. Maybe your debt-to-income ratio is too high, but not by much, and you have enough room in your budget to make extra payments and reduce your debt significantly over the next couple of years. You might have a good job, or gotten one with a significantly better salary, but you haven’t been there long enough for a lender to consider it a stable source of income to repay your mortgage over the long run. Similarly, you might be successfully self-employed, but not have a long enough track record to make lenders comfortable.
If any of these describe your situation, renting to own might be a good idea. You can lock down a property you like now and possibly save yourself a move or two. Then you’ll have some time, typically in two to three years, to improve your credit score, lengthen your employment history, increase your savings or do anything else you need to make yourself a stronger mortgage applicant.
Are the Fees Feasible?
When you rent to own, you pay a lease option fee to secure your right to purchase the property at a later date. This fee usually nonrefundable. So be wary of getting into this if there’s a more than 50/50 chance you’re going to move and not buy.
If you don’t ending up buying, you’ll also have wasted money on the nonrefundable rent credits. These are a portion of your monthly rent payment that the landlord/seller credits toward your down payment if you buy, but keeps as compensation for having taken the property off the market if you don’t. Factoring in these credits often makes the monthly payments slightly higher than the “going rate” for regular rentals. So that means you’ve paid more each month for nothing if you don’t purchase. It isn’t likely that you’ll get a landlord/owner to agree to a refundable rent credit and refundable option fee to give you the flexibility to move.
Since it’s less common, the rent-to-own process isn’t as tightly regulated as the home-buying industry or even the rental industry. This lack of regulation can be a good thing, in that it gives would-be buyers and property owners more freedom in negotiating the purchase option part of their contract (the lease agreement and purchase agreement are still subject to all the usual real estate laws). On the other hand, the lack of industry standards might make it easier for unscrupulous owners to take advantage of unsophisticated buyers. In addition, there isn’t nearly as much educational material available on renting to own as there is on buying a house outright.
The Bottom Line
Renting to own a home isn’t for everyone. In fact, it’s not for most people, but if you’re considering it, there are some great tips to follow. You’ll face a limited selection of properties. There are many things that can prevent you from buying the home at the end of the lease term, from a change in your life circumstances to a continued inability to qualify for a mortgage – and there are penalties, in the form of nonrefundable fees and costs, for not carrying through with the purchase. Nevertheless, for those who just need to buy some time, renting to own can be a way to reside in your dream home now, and pay in full for it later.
Also check out this article by FOX: What to Know Before Jumping into a Rent to Own Lease