How Does Renting to Own Really Work?

by | Housing Information, Rent to Own

 In the years leading up to the financial crisis of 2007-08, the renting to own model — in which tenants/buyers have an option to purchase the house or condo they’re renting from their landlord/seller— was mostly offered by individual homeowners. In the years following the crisis, it became a bigger option for tenants as large real estate investment firms bought up foreclosed homes across the country and implemented the renting to own model on a larger scale.

This helped formalize the renting to own model, whereby tenants can have a portion of their monthly rent payments accrue toward a down payment to eventually buy the home they’re renting.

With the renting to own option now available to more tenants to buy a house or condo, many consumers ask: how does renting to own work? To answer that question, let’s review the basics of renting to own.

 

Tenant/Buyer Perspective for Renting to Own

renting to ownIf you’re looking for a place to live, plan to rent today but eventually want to purchase your own house or condo, and don’t plan on moving from the area you’re targeting for rentals, then renting to own could be an option for you. It’s also a good option if you have less than stellar credit and need time to build up good credit history while renting.

Rent-to-own is when a tenant signs a rental agreement or lease that has an option to buy the house or condo later — usually within three years. The renter’s monthly payments will include rent payments and additional payments that will go towards a down payment for purchasing the home. The lease contract will state the tenant’s rental payment, how much of the rental payments accrue toward a down payment, and how much the purchase price of the home will be.

Before you sign a renting to own lease from your landlord/seller, you should get pre-approved for a mortgage at the purchase price stated in the contract or lease to ensure you can afford the home. If you can’t, renting-to-own may not be the right option, because the contract could inflate the rental price slightly to account for the contribution of the rent payment that’s accruing toward your down payment (more on this below).

For example, let’s say you signed a renting to own lease that had your rental payments at $1,450, with $250 per month accruing toward a down payment, and a purchase price of $250,000. This would mean you’d accrue $9,000 over three years to go toward a down payment, which would be 3.6 percent of the purchase price.

Assuming you didn’t save any more money than that during that time, you could buy the home using a 3.5-percent FHA loan. As long as your pre-approval in the beginning of the process determined you could afford this, it might be a good deal.

What if you couldn’t afford this as a home buyer, but you still wanted to rent the home? You must ask the seller if the home could be rented for cheaper without the renting to own option. Usually this is the case, because most mortgage lenders only allow the down payment accrual to be a sum that’s above the local market rent. So in this example, not having a renting to own option might mean your rent is $1,200.

You should always have an attorney look at a renting to own contract or lease, because there is no industry standard template for writing renting to own contracts or renting to own leases. You need to be clear on who’s holding the down payment funds, as well as specific state regulations and tax considerations.

The obvious benefit of renting to own options is that your housing plans are in place all at once. This works if you don’t want or need to move. But if you do want or need to move, renting to own will limit you to that single property purchase option, and therefore might not be worth it.

Rent-to-own is also a good option for people who might have recent credit trouble that they need a few years to repair. Your credit score plays a big factor in the mortgage rate you’ll get, which can make a big difference in your monthly payments. Your credit score also helps determine whether you’re eligible for a mortgage.

Making your lease payments on time can help improve your credit. Just make sure your landlord/seller reports your rental payment data to the major credit reporting agencies. There are many other things you can do to improve your credit score while you’re in the rental period of your lease agreement. Start by requesting your free credit report. Federal law entitles you to one free credit report once a year from AnnualCreditReport.com, a website set up by the three major credit bureaus.

 

Landlord/Seller Perspective for Renting to Own

The renting to own purchase model can be a good option for sellers whose houses have been on the market for some time and they can’t find a buyer for a variety of reasons: Perhaps it’s more advantageous to rent in your area. Or maybe interested buyers don’t have high enough credit or enough of a down payment to qualify for a mortgage. The renting to own option can attract potential buyers by giving them a chance to slowly build credit and pay their down payments over time. Just make sure your potential buyers can have high enough credit to qualify for a loan when it’s time to buy.

If you’re a landlord looking to sell your home and want to give a renter the renting to own model, you’ll need to consult an attorney to draft a contract or lease for you since (as noted above) there are no standard templates for this kind of lease option for sellers.
The two most common benefits to a home owner for selling their house or condo in a renting to own agreement are:

You can lock in the future sale price of your home now, and not have to worry about market fluctuations.
If you’re renting to a tenant who eventually wants to own the home, the quality of the tenant is likely to be much higher, and they will treat the house or condo with more respect.
One drawback of the renting to own selling option is that you might want to sell your house or condo sooner, and if your contract or lease doesn’t allow for you to do so, you could be locked into the terms you agree to with your tenant/buyer. Consult your attorney on how to make this sale provision of your contract negotiable if you need this flexibility.

 

Institutional vs. Individual Landlords/Sellers for Renting to Own

Individual homeowners offering a renting to own option for their leases usually set up contracts for three years. Institutional homeowners (like real estate investment companies) often have two-year lease contracts that can be extended for up to four more years after the initial lease term. This offers more flexibility for tenants/buyers.

Institutional renting to own companies are often publicly traded, so they’re subject to a whole host of regulatory scrutiny, which means they’ll be more stringent about consumer protection. This means your contracts will be very clear about the rules of engagement, who holds the down payment funds, and how disputes are resolved.

Big renting to own companies also have consumer help resources to help you with credit counseling and repair. In fact, some companies required their renters to go through credit counseling. If you need credit help, this might be a great resource for you.

If your credit is perfect, you’ll want to avoid a company with this option, or maybe stick to working with an individual landlord/seller.

 

Women Grants in The United States
A lot is being granted to the citizens of America in the name of grant scheme. Various categories of financial needs are being accomplished through these grants. Some of the most popular grants schemes ever are the grants for men, grants for women, grants...
History of St Patrick’s Day
 St. Patrick’s Day is celebrated annually on March 17, the anniversary of his death in the fifth century. The Irish have observed this day as a religious holiday for over 1,000 years. On St. Patrick’s Day, which falls during the Christian season of Lent,...
Social Security Disability Benefits
Sometimes in life, events occur that prevent people from working in order to make a living. Accidents occur and illness strikes at the most inopportune moments. The Social Security Administration may be able to help. They provide disability benefits to...
Natural Antibiotics and Antivirals
  Antibiotic Herbs The issues of antibiotics and antibiotic-resistant bacteria have gotten a lot of attention lately. The concern is that bacteria, having been exposed to antibiotics for so long, have developed a resistance to the antibiotics, creating...
Unpaid Wages Recovery Guide
Unpaid Wages Recovery Guide If you worked for it, then you should get it. Everyday can be a struggle and still come up on the short end of the stick. That is why you may be frustrated when you are not paid the money you are owed. Fortunately, there are many steps that...
Is Public Housing An Option for You?
The US Department of Housing and Urban Development (HUD) utilizes several programs to ensure housing for lower-income families. One of these programs is Public Housing. This program was designed to provide decent and safe rental homes for lower-income...
Best Advice for Seeking Employment
Your career and life depend on you taking the time to learn all that you can about earning gainful employment. You cannot get a job without finding the right approach that will open up opportunities. Keep reading if you wish to learn more. Speak with...
How Does Renting to Own Really Work?
 In the years leading up to the financial crisis of 2007-08, the renting to own model — in which tenants/buyers have an option to purchase the house or condo they’re renting from their landlord/seller— was mostly offered by individual homeowners. In the...
Rent Assistance and Low Cost Housing
With todays economy fluctuating , many individuals and families are struggling to pay bills in a timely fashion, including their rent. The good news is that there are a variety of options available to anyone who is facing late fees, court dates or even...
Lifeline Assistance Program
 There is now a program out there that can even help with your cell phone. The special government program called Lifeline Assistance that offers a free phone and minutes to those who qualify. Getting on the list is not very hard, but there are a few things...
Solid Advice for Credit Repair
It may be difficult to find information on the best ways to improve your credit. There is a wealth of different tips in this article to help you rebuild your journey to credit repair. Using these tips can save you from stressing and prevent headaches....
Searching for Online and Freelance Employment
Searching for Online & Freelance Employment Many career fields and skills do not fall under traditional frameworks for employment. Writers, photographers, marketers, teachers and artists may be able to find work as online freelancers to continue improving their...
How to Manage Credit Card Payments
Do you have issues paying off credit cards? Sometimes the interest itself can be an overwhelming monthly payment. We have gathered some information below from credit experts that can hopefully help you manage your payments and find a way out from under...
Finding Employment with Job Searches
Finding Employment with Job Searches Sometimes, life hits Americans hard. With ups and downs in the economy, it may be difficult to maintain consistent employment over a long period of time. Fortunately, there are options to help find a new job or career. In the...
Health Insurance Coverage Changes | ACHA
Healthcare reform tends to be tricky and complex as it attempts to find a common ground that is beneficial for all people. Burdened by the political firestorms that surround it, the new healthcare bill approved by the House of Representatives will...
Should You Consolidate Student Loans?
Should You Consolidate Student Loans? In order to make it through the years of school, students take on a lot of debt from various loans. Sometimes, these loans come from private lenders with higher interest rates and fewer protection. Most loans, however, are funded...
How To Get The Best Insurance Deals
In most cases finding the best insurance deals is difficult. Since having insurance is a requirement rather than being optional it is a good idea to shop around for the best insurance deals. It’s difficult to shell out the cash for insurance premiums and...
Social Security Disability Benefit Application Help
 There are several advantages to applying for Social Security Benefits online. There is no need for an appointment and it will definitely save you time. Visitng your local Social Security Office can be very time consuming and frustrating. Read the...
The Greatness of Good Friday
 What a supreme paradox. We now call the day Jesus was crucified, Good.Many believe this name simply evolved—as language does. They point to the earlier designation, "God's Friday," as its root. (This seems a reasonable conjecture, given that "goodbye"...
Best and Worst Student Loan Services
Best and Worst Student Loan Services This is the time of year when hundreds of thousands of Americans begin to prepare for their first semester in college. They begin to seek out the items that will sustain them during dorm life. Parents spend money on new sheets, hot...

Subscribe

Family Picnic

Enter Your Email for Best Results

Due to the overwhelming response, please enter your name and email to ensure the proper search results.

You Are On Your Way!

Family Picnic

Enter Your Name and Email for Best Results

Due to the overwhelming response, enter your email for best results. Look for your free ebook from New Flex Career about finding unclaimed money!

You Are On Your Way!

Family Picnic

Enter Your Email for Best Results

Due to the overwhelming response, please enter your name and email to ensure the proper search results.

You Are On Your Way!

Family Picnic

Enter Your Email for Best Results

Due to the overwhelming response, please enter your name and email to ensure the proper search results.

You Are On Your Way!

Pin It on Pinterest

The More You Share. The More We Can Help!

Share these posts & pages with friends!