Rent-to-Own Homes: Advantages and Disadvantages + FAQs

Buying a home is a big decision. For most people, it’s the largest purchase they’ll ever make. That’s why rent-to-own homes are an increasingly popular option for people who want to buy a home but need some time – or assistance – to do so.

Unlike a traditional home purchase, a rent-to-own agreement allows you to rent a property for a set period, usually one to three years. During that time, you have the option – but not the obligation – to buy the home.

Rent-to-own agreements can be beneficial for both buyers and sellers. But rent-to-own homes are not for everyone. To avoid mistakes when buying a house, let’s take a closer look at the pros and cons of rent-to-own homes and FAQs about the rent-to-own process!

Advantages of Rent-to-Own Homes

There are several advantages of rent-to-own homes. Here are a few of the most common:

You can lock in a purchase price.

With a rent-to-own agreement, you can lock in the purchase price of the home you’re renting. This is beneficial if you expect the home’s value to increase during your rental period.

Think about it – if you rent a home for $1,500 per month for three years, and the purchase price is $200,000, you’ll effectively be paying $54,000 less for the home than if you bought it outright today.

You can build equity.

Unlike regular renting, with rent-to-own agreements, a portion of your rent payment goes towards the home’s purchase price.

So, if you eventually decide to buy the home, you’ll already have some equity. And if the value of the home increases during your rental period, you’ll also benefit from that.

You have time to improve your credit score.

If your credit score isn’t where you want it to be, a rent-to-own agreement can give you time to work on improving it. A higher credit score will help you qualify for a better mortgage rate when you’re ready to buy it or a different house things to know before buying a beach house).

You can move in immediately.

With rent-to-own agreements, there’s no need to wait to save up for a down payment or go through the mortgage approval process. You can move into the home right away and start building equity.

Of course, you’ll still need to qualify for the rent-to-own agreement, which may require a credit check and background check. But it’s generally easier to qualify for a rent-to-own agreement than it is to get approved for a mortgage.

You don’t need a large down payment.

Speaking of down payments, with rent-to-own agreements, you may not need one at all. Many rent-to-own agreements don’t require a down payment!

And even if yours does, it’s likely to be much smaller than the traditional 20% down payment required for a mortgage. The reason? With rent-to-own agreements, you’re not buying the home outright – you’re just renting it with the option to buy.

So, the risks are lower for the seller, which may allow them to be more flexible on the down payment requirements.

Disadvantages of Rent-to-Own Homes

With all the glitz and glamour of rent-to-own homes, it’s easy to forget that there are some potential drawbacks. Here are a few disadvantages of rent-to-own agreements to keep in mind:

You may not actually own the home.

Hold everything – didn’t we just say that rent-to-own agreements allow you to buy the home you’re renting? While that’s true, there’s always a chance that things could fall through.

If you don’t make your rent payments on time or meet the other terms of your rent-to-own agreement, the seller could reclaim the home. So, while rent-to-own agreements do offer a path to homeownership, there’s no guarantee that you’ll actually end up owning the home.

The rent payments could be higher than the market value.

Another thing to keep in mind is that rent-to-own agreements are typically for a set period, usually one to three years.

During that time, the rent payments may be higher than they would be if you were just renting the home outright. That’s because a portion of your rent payment is going towards the eventual purchase price of the home.

So, if you decide not to buy the home at the end of your rent-to-own agreement, you may have overpaid for rent.

You could still get foreclosed on.

Unfortunately, rent-to-own agreements don’t necessarily protect you from foreclosure. If the seller runs into financial trouble or decides to sell the home to someone else, you could still be forced to move out.

And if you haven’t completed the rent-to-own agreement and don’t have another place to live, you could end up homeless.

You may not have enough time to save for a down payment.

Remember how we said that rent-to-own agreements could be beneficial if you’re working on improving your credit score?

Well, the same thing goes for saving up for a down payment. If you don’t already have the money saved up, you may not have enough time to do so during your rent-to-own agreement.

And if that’s the case, you could end up having to walk away from the home when your rent-to-own agreement expires – without ever actually owning it.

You could get scammed.

Beware of rent-to-own scams! These scams typically involve a seller who’s desperate to sell their home and a buyer who’s desperate to buy it.

The scam artist will act as a middleman, promising to help the buyer rent the home with the option to buy it. But instead of owning the home, the buyer is actually just renting it from the scam artist.

And when it comes time to buy the home, they’ll find that they don’t have the option to do so. To avoid rent-to-own scams, make sure you work with a licensed real estate agent and an experienced rent-to-own attorney.

FAQs About Rent-to-Own Homes

Now that we’ve covered the basics of rent-to-own homes, let’s answer some frequently asked questions about rent-to-own agreements:

Q: How does the rent-to-own process work?

A: The rent-to-own process typically starts with a real estate agent helping you find a rent-to-own property. Once you’ve found a property you’re interested in, you’ll need to negotiate the terms of the rent-to-own agreement with the seller.

Once you’ve reached an agreement, you’ll sign a rent-to-own contract and start making rent payments. At the end of the rent-to-own period, you’ll have the option to buy the home.

Q: How much do you need for a down payment on a rent-to-own home?

A: The amount you’ll need for a down payment depends on the terms of your rent-to-own agreement.

Typically, the seller will require a down payment that’s equivalent to 2-5% of the home’s purchase price. So, if you’re buying a $200,000 home, you could expect to need a down payment of $4,000-$10,000.

Q: Can you get a mortgage for a rent-to-own home?

A: Yes, it is possible to get a mortgage for a rent-to-own home. But it can be difficult to qualify for a mortgage if you’re currently renting.

Lenders will typically require you to have a good credit score and a steady income before they’ll approve you for a mortgage. So, if you’re working on improving your credit or increasing your income, rent-to-own could be a good option for you.

Q: What is the difference between rent-to-own and lease with an option to buy?

A: The difference between rent-to-own and lease with an option to buy is that, with rent-to-own, you’re typically required to make rent payments that go towards the purchase price of the home.

With a lease with an option to buy, you’re only required to make rent payments and don’t have to put any money towards the purchase price of the home.

Q: What is a rent-to-own attorney?

A: A rent-to-own attorney is a lawyer who specializes in rent-to-own agreements. They can help you negotiate the terms of your agreement and protect your rights as a tenant.

Rent-to-own attorneys are typically not required, but they can be helpful if you’re entering into a rent-to-own agreement.

Conclusion

Rent-to-own homes can be a good option if you’re not ready to buy a home outright. But there are some risks to consider before entering into a rent-to-own agreement.

Make sure you do your research and work with a licensed real estate agent and an experienced rent-to-own attorney to protect your rights and avoid rent-to-own scams.