Rent to Own Mortgage Guide

Not everyone can afford to buy a house with cash upfront. If you are like other purchasers, then rent to own mortgage can be right for you.  Rent to own is an alternative to other traditional home loans, where you borrow a lump sum of money to purchase a property.

Although a home loan is an option, it can be hard to acquire if you have bad credit. a rent-to-own mortgage can be a good housing option if you have bad credit, low income, or you have no cash to pay for the down payment. But before you get a rent to own mortgage, you must understand what it is, the process, the pros, and the cons.

What is Rent to Own Mortgage?

A rent to own mortgage is a contract between the seller and the buyer, where the home can be purchased later on by the buyer after the rental period using the cumulative rent paid towards the down payment.

The rent will serve as a down payment for the equity of the home. However, some rent to own agreements require a down payment. After the rental period, if the renter does not want to buy the property, the money will be kept by the seller.

If you missed several payments, there is a chance for you to get evicted, which is the natural consequence of not paying for rent. When this happens, the money will be kept by the seller, again as a form of rent payment. This scheme is common to slow real estate markets where houses are difficult to sell.

Read more about how to purchase a home you are currently renting.

The Difference Between Lease option and Lease purchase

There are two types of rent to own mortgage: lease option and lease purchase.

Lease Option – With the lease option, you will have the choice of whether to buy the rented house or not at the end of the rental period. If you choose the lease option, you will forfeit all the rent money you paid to the seller, because again, the payment was for rent.

Lease-purchase – A lease purchase agreement legally binds the renter to purchase the house after the rental period. If you don’t buy the property, then you will be legally liable. That’s why before signing the agreement, get an attorney to explain the terms of the contract.

Rent to Buy Terms to understand

Here are some of the terms you need to pay attention to:

  1. Purchase price –  The agreement will state how the purchase price will be determined. It can be determined via the current value of the house or a fixed value already stated in the agreement.
  2. Rent payment –  This is paid every month, which will form part of the purchase price. This payment will serve as the down payment if you decide to purchase at the end of the rental period. The seller will keep this amount at the end of the period if you choose not to buy it.
  3. Option money –  Some contracts require payment of a non-refundable fee, usually at the start of the lease. Typically, it is a percentage of the home’s purchase price or a flat fee. This allows you to buy a house or can be part of the equity of the home.
  4. Maintenance expenses –  During the agreement, the seller may require you to pay for maintenance fees for repair, real estate tax, and homeowners association fees. You may also be required to pay for broken air conditioning units and landscaping.
  5. Closing –  At the end of the rental period, should you choose to buy the rented house, you will have to get financing. Here, the seller will give you a certain period before you will own the property.

Rent to Own Mortgage Advantages

One of the advantages of rent to own mortgage is that you will slowly build your down payment instead of coming up with a large sum of money to pay for the purchase of the house. 

Another advantage is that you don’t have to commit to the house right away. Since you are renting, you will get to know the quirks of the house. Although you already paid for the rent and option money, you can still decide not to purchase the home at the end of the lease.

If you have bad credit, then this agreement may be right for you. During your rental, you will have the opportunity to build up your credit score before taking out a loan at the closing period. With a higher credit score, the interest rate of the financing you will get later on will be lower.

Rent to Own Mortgage Disadvantages

If you cannot qualify to buy the house at the end of the rental period, then you will lose the rent money you paid during the rental period, together with the option money. This means the rent money will not be refunded because it was originally intended to be part of the purchase price. Still, it is not a total loss because you will have paid for housing during the rental period.

You will also be restricted to how you want to use the property. Some sellers will prohibit you from keeping a pet, painting the walls, changing the flooring, or subletting some rooms. There is a risk of getting evicted for violating the terms of the lease, which means all those rent money intended for the purchase price will go to waste.

It would help if you also watched out for scams. There are reported cases where sellers will get the option money, but the buyer will never have the chance to buy the property. Some even charge too much rent, higher than the usual market rent.

Rent to Own Mortgage Recommendations

There are a few things we recommend you detail in a contract before agreeing to a rent to own scenario with a homeowner.

Negotiate the purchase price before the agreement begins and have that outlined in the contract. You cannot trust the seller to come up with a fair market price at the end of the lease period. You could end up with a price that is far above market value.

Negotiate the interest rate up front and have that also included in your contract if possible. This is extremely important because the seller could use a high interest ploy as a way to cancel the contract or your interest in purchasing the home due to a high interest rate.

Make sure the seller is fixing anything that needs to be repaired during the rental period so these repair issues do not become your problem once you own the home.

Rent to Own Mortgage Lenders

There are lenders who will allow you to purchase a home using the rent payments towards the down payment. These rent to own mortgage lenders are typically not your local neighborhood bank and they may permit you to use a rent to own contract for an FHA loan, conventional loan or even a bank statement loan.

If you are in the midst of a rent to own lease contract, it would be a smart idea to speak with a lender now about your mortgage options. You do not want to begin this process when you are just a few weeks away from the end of your lease agreement.

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Renting to own can be a great way to purchase a home when you do not have enough for a down payment but can afford rent payments.  Make sure you include the terms of the agreement in a binding contract and remember not to violate your end of the contract. 

Finally, speak to a lender before entering into an agreement to be sure you can get financing based upon your financial situation and credit profile.

Related Questions

What is seller financing? 
In some purchase transactions including rent to own scenarios, the seller will hold the mortgage on the home for a specified number of years at prevailing interest rates. These loans often do not have the same qualification hurdles that you may find with a traditional lender.

Can I get a rent to own mortgage with bad credit?
There are lenders who who have mortgage programs for individuals with bad credit and it can be bundled with a purchase contract for rent to own homes.

We are able to help you to find you a rent to own mortgage in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.

Related Articles

How to get an FHA loan with no money down – If you do not have money for a down payment or closing costs, there are ways to still buy the home with an FHA loan.

Best mortgage programs for first time home buyers – If you are a first time home buyer, there are various mortgage options for you. Some of which will require a small down payment and may also allow for low credit scores.

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