Rent-to-Own Homes: What You Need to Know
If you’re a renter hoping to buy a home, you may have come across the term “rent-to-own” (sometimes called “rent-to-buy”). At its core, it’s a legal agreement that allows you to rent a home now with the possibility — or obligation — of buying it later.
On the surface, the concept sounds simple: part of your monthly rent is credited toward a future down payment. Over time, this can build up savings to help you purchase the home. However, the reality is often more complicated, with potential risks that renters should carefully consider.
This article explains the basics of rent-to-own, including how it works, the different types of contracts, and the opportunities and pitfalls to watch out for.What Does Rent-to-Own Mean?
A rent-to-own agreement is a lease that includes either the option or the obligation to purchase the home at a later date, typically within two to three years.
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Monthly rent: A portion of your rent is allocated toward a future down payment.
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Accrued credit: The contract specifies how much of your payment is credited.
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Purchase price: The home’s price is usually set in advance and written into the agreement.
Example
Suppose you sign a rent-to-own contract with monthly rent of $1,450. Of that, $250 goes toward your down payment. Over three years, you’d build $9,000 in credits — equal to 3.6% of a $250,000 home. That amount could make you eligible for an FHA loan (which requires just 3.5% down) or possibly even a conventional mortgage, provided you meet other requirements.Who Offers Rent-to-Own?
Rent-to-own agreements can be structured by:
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Individual homeowners: Typically offering three-year contracts.
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Institutional rent-to-own companies: Often set shorter terms (two years) with the possibility of extensions.
Is Rent-to-Own Right for You?
A rent-to-own home may be worth considering if:
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You want to live in the same area long term.
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You need time to save for a down payment.
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Your credit needs improvement before you can qualify for a mortgage.
Make sure you weigh the benefits against the potential downsides.
Large companies may provide clearer contracts, regulatory oversight, and even resources like credit counseling. In some cases, counseling is required before entering an agreement. Still, whether the agreement is with a landlord or a company, the same cautions apply: understand the contract fully before signing.Types of Rent-to-Own Contracts
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Lease-Option
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Gives you the option to buy the home.
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You may lose the option if you’re late on payments or miss deadlines.
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Lease-Purchase
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Requires you to buy the home at the end of the lease.
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Failure to follow through could result in legal liability or forfeiting the money credited toward your down payment.
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