Owning a home is still considered the American Dream. But if you have no credit or bad credit, or if you don't have money to put down, it can seem more like a fantasy. Perhaps you've heard of renting to own a home and are considering it. But what does it really mean to rent-to-own?
It works something like this: You sign a lease, agreeing to lease the home for one to three years. You'll put down a certain amount -- say three to five percent of the purchase price of the home -- and agree to pay the rent plus an additional monthly amount that is set aside, typically in an escrow account. That portion will eventually be the down payment to be used during the actual purchasing of the home.
For example, if the home would typically rent for $1,500 a month, you may agree to pay $1,800 a month, with the extra $300 going toward the down payment when you purchase the home at the end of the lease term. If you can't afford that extra amount, this could quickly get dicey -- if, for example, you are late on your rent one month, you may forfeit the extra money for the month. And, if the property owner doesn't feel that you are living up to your end of the deal (paying rent late, not abiding by the lease terms, etc.), they can evict you -- and you won't get any of that money back.
On the other hand, if you pay your rent on time, you will be building your credit while saving a nice down payment, making it easier to qualify for a home loan.
If you decide it's worth the risk, there are some steps you should take to protect yourself. First, make sure you will qualify for the loan at the end of the lease term. Consult with a mortgage lender to know exactly how much you'll need for the down payment and how much you'll qualify for. If you don't do this, you may end up not qualifying for the loan at the end of the lease term -- and all of that extra money you paid won't be refunded.
Make sure you are entering a lease with option to buy agreement -- not a lease-purchase agreement. This is important, because if you sign a lease-purchase, you are obligated to purchase the home at the end of the rental period. If you don't, the property owner can sue you. If it is a lease with the option to buy, you aren't committed -- you can walk away if you change your mind.
But if you decide to walk away, it will cost you -- that initial payment of three to five percent may be forfeited, along with the extra monthly payments. Also, be aware that the price of the home is locked in -- this could be a great thing for you if the property value goes up while you are renting, but it could also go the other way and you'll end up paying more than the home is actually worth.
Rent-to-own homes do come with an element of risk -- and the potential for fraud. Make sure you consult with a real estate agent and an attorney to protect your interests. It is also a good idea to treat this as if you are buying the home today -- get a home inspection and have any issues addressed up-front. Make sure the home isn't in foreclosure, and check for liens on the property. Be aware of the potential scams. For example, a property owner may withhold the information that the home is in foreclosure. You hand over the initial down payment and the monthly agreed-upon sum, only to lose your money and the home when the bank forecloses.
Look for hidden costs: Does the property owner expect you to pay for maintenance/upkeep of the property? It's possible, since this is a rent-with-option contract, that you may be responsible for that roof leak. Make sure these types of things are listed in the contract. Also, be sure to ask if there are any HOA fees. If so, will you have to pay them, or will the property owner pay them until the actual home purchase?
Finally, be absolutely sure this is the house you want to buy -- you are investing money in this home, and if you walk away, you could lose all of it. If you aren't sure this is the right option for you, it may be better to rent an affordable place and save the money on your own.
Published February 23, 2017
