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If you’ve browsed home sale listings, you’ve probably seen ads for “Rent-to-Own or “Lease-to-Own” homes. These agreements are similar to traditional rental contracts. However, they also give you an option to purchase the rental home.
Curious as to what renting-to-own involves or wondering if it’s a good option for you? Read on to understand the details of a rent-to-own contract and contact us for personalized mortgage advice.
The Anatomy of Rent-To-Own Contract
A rent-to-own contract usually has two parts to the agreement: a standard lease agreement as well as a separate document that outlines your option to buy. Both documents may be incorporated into one document or they exist as two separate ones.
In the rental part of the rent-to-own arrangement, it’ll state that the property will remain as the landlord property unless you choose to exercise the right to purchase the home. While this document will include language that mentions “purchasing,” this is still foundationally a rental agreement. It is not a purchase agreement. Just like any other standard lease agreement, it will include terms concerning the amount of rent to be paid, lease period, and outline the repair and maintenance responsibilities of the landlord.
This difference is most notable in the rent that you’ll pay, as we mentioned above. You’ll still be required to make timely monthly payments, but the amount will be substantially higher than the rent of a similar property. This “extra” amount that you pay is usually put into an escrow account as part of your option to buy. It’s the landlord responsibility to set aside this additional portion of the rent aside to apply toward the principle or to refund it should you decide to purchase.
Your Rights and Obligations
Lease-to-own arrangements have unique features that differ from common lease agreements. This difference is most notable in the rent that you’ll pay, as we mentioned above. You’ll still be required to make timely monthly payments, but the amount will be substantially higher than the rent of a similar property. This “extra” amount that you pay is usually put into an escrow account as part of your option to buy. It’s the landlord responsibility to set aside this additional portion of the rent aside and apply toward the principle of the house or refund it to you upon purchase.
In a way, you’re building equity in the house during the rental period.
Maintenance is also different. Unlike a traditional lease agreement where the landlord is responsible for all repairs, in the rent-to-own contract, you’ll be responsible for the upkeep of the property. Most tenants and landlords consider it a fair agreement since, typically, the tenant will own the house eventually.
Until your exercise your right to purchase, the property is legally owned by the landlord. Yes, even if you have made significant repairs and have invested several months of “equity,” you’ll still have to comply with the terms of the rental agreement. If any of the conditions are violated, the purchase option is voided. You’ll lose your option fee as well as the escrow percentage of the monthly rent payments.
Risks and Benefits
Many consider a rent-to-own agreement because they lack funds for the down payment, or their poor credit has made them temporarily ineligible for a mortgage (remember that poor credit can be improved!). With a rent-to-own arrangement, a tenant will be able to gradually build equity in a property while still having the possibility to opt out. However, financially, this could make the situation worse. If you choose not to exercise the right to purchase the property or fail to come up with the funds for the purchase, you could lose all of the funds you accumulated on the escrow account.
If you have poor credit or zero funds to purchase a home, you have other options other than rent-to-own contracts. Call Tara Mortgage Services for a free consultation to learn about your options!
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