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.

 

Job Hunting at Career Fairs
Are you looking to find a new job or a new career? If you are, you may want to try career day job hunting, as it is a great way to not only find available jobs, but also apply and interview the same day. Looking for new and exciting careers? Click the link below!...
Best Credit Cards for Questionable Credit
Life does not always work out as planned. Sometimes, a gap in employment leads to a few missed payments, and eviction, or a repossessed vehicle. These things happen to most people. In order build credit back up, a credit card may help. Making regular...
Accepting Failure | Achieve Success
Everybody has a setback every once in a while, but it doesn’t mean that there is anything wrong with you. In fact, accepting failure can be a great opportunity to learn your own limitations and boundaries, then push through them, and provide you with a...
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...
Natural Antibiotics and Antivirals
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 "superbugs." The grim reality is...
“Believe in The Power of 3”
The number 3 is the first number to which the meaning “All” was given. It is the number of the whole as it contains the beginning, a middle, and an end. When you raise the number 3 to a second power, it simply magnifies everything you already have and...
Who Qualifies for VA Home Loans
For many veterans and their families, buying a home can be a difficult experience. Many veterans have little patience for the drawn out process of finding a loan, and others have not always had the best luck with credit. Fortunately, Veterans Affairs (VA) can help....
Things You Need to Know About Section 8 Assistance
Things You Need to Know About Section 8 Housing Some families might find a safe, decent and affordable housing as a big challenge to tackle. Majority of regions in the United States do not have rent control laws in place. Therefore some renters find affording a...
Understanding Federal Grants (Part 2)
 In the last issue we talked about how the federal grant system works and how you can make it work for you. In this issue we are going talk about exactly who's eligible to apply for federal grant money. The simple fact is that almost everyone is eligible...
Feeling Lost? Free (Or Cheap) Career Assessment Tools
In today's world, more people are struggling to pay/find for housing, medical bills, education, and other aspects of life. As a result, embarking on a new career is becoming a popular option to better themselves and their families. However, when choosing a new career,...
A VA Home Loan Can Help You Get Affordable Housing
 Ever since the housing market collapse, lenders have tightened the requirements to qualify for loans. If you don't have the required credit score or enough for a 20 percent down payment, it will be difficult to secure qualification for a conventional...
Five Great Resources for Working from Home
 There have been thousands of people watching “Good Morning America” who have sent us messages thanking us for helping them make the money while working from home. For anyone who hasn’t yet taken the leap forward but feel as though you might be ready,...
Denied Insurance Claim? Don’t Give Up!
Buying insurance is a common and thoughtful step that people take to protect themselves financially from a major mishap, accident or other type of loss. When you purchase insurance, you understandably expect the insurance company to pay out on a claim so that you can...
How Do You Repair Your Credit Score?
How Do You Repair Your Credit Score? You may be bombarded with ads for businesses telling you they can help fix your credit. Many companies say they have some kind of proven method for improving your credit score. However, you should first follow this advice and see...
Increasing Literacy in Children
Increasing Literacy in Children Literacy is important. This is a fact that cannot be stressed enough. Often, arts and literature are tossed to the side to make way for additional funding in other areas, but learning to read lays the foundation for further education...
5 Strategies to Reduce Stress and Strengthen Family Relationships
 Stress is everywhere. You feel stressed at work and on your commute, and maybe even your home, the place that is supposed to be your sanctuary. When you arrive home from your job, you're met by bills that need to be paid, children that need to be fed and...
Disability Lawyers | Filing SSA Claims
According to the Social Security Administration, an average of 52% of applicants is rejected yearly. This only shows that the government is very serious in paying only those who deserve these benefits. So, it is important that social security disability...
Section 8 Vouchers Less Likely to be Accepted
 About 300 less, that is the number in Nashville, TN. Since 2010 there has been 300 fewer Section 8 vouchers accepted throughout the Greater Nashville Area. Families are being kicked out of their apartments and housing because the owners have just decided...
Applying and Making Phone Calls to Potential Employers
Applying and Making Phone Calls to Potential Employers Applying to Places Not Hiring: A Wise Move or Not? Are you in desperate need of a job? If you are currently unemployed or if you truly think that your current job is making you “crazy,” you may be due for a new...
How To Get A Work-From-Home Job and Earn $275 Per Day
How To Get A Work-From-Home Job & Earn $275 Per Day There are many advantages to working from home. There's no expensive and time-consuming commute, for example, and it's also possible to work from home while juggling other responsibilities. However, while many...

The Premier Forex League

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 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 to Receive New Assistance Updates

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

Thank You! You will now receive the latest assistance updates!

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

Share This