How Does Rent-to-Own Work?

A rent-to-own agreement allows you to live in a home and pay rent for a predetermined amount of time before buying it. A portion of your monthly rent might go toward your down payment. In this way, you can save gradually and begin building home equity as you go. But there are potential downsides to consider. Fees may apply, and there’s no guarantee that you’ll qualify for a mortgage at the end of the lease term. Read on for pros and cons of rent-to-own programs.

Benefits of Rent-to-Own

Rent-to-own homes offer several advantages:

• Saving for a Down Payment: If you direct a portion of your rent payment toward the purchase price, it could add up to a sizable down payment you may have struggled to save otherwise. It can also help you build home equity.
• Time to Strengthen Finances: You could use your rental period to pay down debt, improve your credit score, pad your savings, and increase your income before buying a home.
• Price Lock: You’ll likely know the purchase price from the beginning, which can give you peace of mind and allow you to financially prepare.
• Avoid Moving Costs: Moving can be a hassle and has costs of its own. You could save thousands on supplies, furniture, movers, and more.

Downsides of Rent-to-Own

While rent-to-own agreements have their benefits, there are also some downsides to consider:

• Higher Rent: Your rent may be higher with a rent-to-own property, especially if part of your payment is going toward the purchase price.
• Fees: Nonrefundable option fees vary, but you could lose money if you decide not to purchase the home.
• Maintenance Costs: You may have to cover maintenance costs, insurance, and property taxes, which could add up to major out-of-pocket expenses.
• Financing Isn’t Guaranteed: You’ll still have to qualify for a mortgage if you finance your home purchase. Closing costs can also add an extra 2% to 5% to the total.

Is Rent-to-Own a Good Idea?

There are pros and cons of rent-to-own homes. Whether it’s right for you will depend on your financial situation and goals around homeownership. Your price-to-rent ratio can help clarify if renting or owning is the better option. To calculate it, divide the median home price in your area by your annual rent cost. A price-to-rent ratio that’s less than 15 suggests that buying might make the most financial sense. In this case, a rent-to-own agreement could help you achieve that goal.

However, there are potential fees and expenses to consider, and your rent payment may be on the higher side. Building a strong financial foundation is important—especially if you’ll be obligated to buy the home at the end of your lease term. If you’re interested in rent-to-own homes, choose a company that’s well established in your area and has positive reviews.

Alternatives to Rent-to-Own

If rent-to-own doesn’t seem like the right fit for you, consider these alternatives:

• First-time Home Buyer Assistance: Check with your state to see if you qualify for any first-time home buyer programs. That may include loans and grants to help cover your down payment or closing costs.
• Federally Insured Home Loans: Government-backed mortgages are known for their low down payments and softer eligibility requirements. With an FHA loan, for example, first-time home buyers could get a mortgage with a down payment as low as 3.5%.
• Saving a Down Payment on Your Own: Another option is to save a down payment on your own while renting. Money market accounts, high-yield savings accounts, and certificates of deposit (CDs) can allow you to earn interest on your savings until you’re ready to buy.

The Bottom Line

A rent-to-own agreement could make it easier to buy your first home, assuming the contract terms make good financial sense. You can use the rental period to strengthen your down payment and improve your credit.

At O1ne Mortgage, we understand the complexities of rent-to-own agreements and are here to help you navigate your path to homeownership. Whether you’re considering a rent-to-own option or exploring other mortgage solutions, our team of experts is ready to assist you. Call us today at 213-732-3074 for personalized mortgage services and take the first step toward owning your dream home.