When we use the term “Rent to Own”, we are referring to a specific program set out by many companies, investors and individuals. It’s important to understand that not all mortgage brokers offer Rent to Own programs, nor might they be affiliated with anyone who offers this type of program. Here are a few of the most commonly asked questions about Rent to Own, answered in full detail:
How does Rent to Own work?
Rent to Own is exactly that – a program that allows you to rent a property that you would eventually intend on purchasing. There is a contract put into place that outlines all terms and conditions concisely, most specifically the terms of how you eventually become the owner of the property. Essentially, part of your monthly rental payment is set aside to be used toward the down payment when the home is ready to be purchased at a predetermined future value. The best way to illustrate the Rent to Own program is to explain what I believe to be the 3 basic steps:
Step 1: (Making the decision) Today, you decide to enter into a Rent to Own program for a home you eventually want to purchase, but cannot purchase at the moment possibly due to any of the below examples (examples extend beyond those suggested):
- Credit (ex. Credit does not meet banks guidelines and you need sufficient time to repair it)
- Income (not employed full time, starting your own business, etc.)
- Down payment (perhaps you do not have the minimum 5% saved and need time to accumulate savings but need somewhere to live in the interim)
Step 2: (Contract) The contract stipulates how much rent will cost monthly, how much of the rental income is used toward your future down payment, the length of the contract, the future agreed upon purchase price, etc. Many Rent to Own programs will allow you the flexibility of choosing any home yourself (assuming it is within your affordability range). Others might have a list of homes you can choose from.
Step 3: (Honoring the contract) When the Rent to Own contract matures (whether that be 2 years, 3 years, etc.) you are expected to honor the contract by purchasing the property legally. This involved the signing of the sale documents, obtaining a mortgage approval, providing any additional down payment funds, etc.
What happens within the 2-3 year contract of the Rent to Own?
Within the 2-3 year Rent to Own contract, you are considered a tenant of the property. Only until the legal transfer of ownership (at maturity) will you become the owner of the subject property. Also, within the 2-3 year term, you are expected to abide by the terms/conditions of the typical lease agreement (initially set out in the contract). If once the contract matures, you are still unable to obtain financing for the purchase of the property; you may lose the right the purchase the home. All contracts will be different and typically require the review of a Real Estate Lawyer (and if this is not required, I strongly recommend you have a lawyer review it anyway!).
This is subjective, and there are typically 2 sides to this argument:
- Rent to Own is worth it – Many will argue that a Rent to Own brings discipline to saving money for a down payment that would otherwise be hard to do with current money management practices. This could hold true… as someone is essentially laying out a ‘savings program’, for lack of a better term, for you to ensure your money is eventually used for the down payment. This however does not solve the program of ensuring discipline is used when saving money for closing costs (legal, land transfer, brokerage, etc.) and additional miscellaneous costs of purchasing a home. If you fail to save the required money, you could be held accountable for breach of the original contract and the 2-3 years may not result in you owing the home after all.
- Rent to Own is not worth it – Many will argue that while the Rent to Own program offers you the opportunity to live in the home now before actually purchasing it, what it does not offer is guidance. If you are unable to buy today, for any of the reasons mentioned above, then who is going to ensure that you are prepared to purchase in 2-3 years? Who is going to ensure your credit is repaired? Who is going to update you on current underwriting guidelines and changes in mortgage qualifications? The answer is likely not ‘the rent to own program’. The Rent to Program arguably offers you a short term solution within out the guidance for the long term gain.