By Queen Peterson, REALTOR®
Rising home prices, job uncertainty, or credit worries might be some of the reasons leading you to delay your home purchase for the time being. But what if there was a way to take steps toward homeownership while still renting?
Rent-to-own acts like a bridge between renting and buying, and may be a good option to one day becoming a homeowner. However, it is also financial decision that should be carefully considered based upon your personal circumstances.
What is Rent-to-Own?
First, let’s define rent to own. Formally called “rent with the option to purchase,” it allows you to rent the property now and purchase it at a future date.
Most rent to own agreements contain three parts:
- The lease agreement: This outlines your rent payments and other rental terms
- The option agreement: This is an additional payment that will be placed into escrow and applied to your down payment or closing costs when you purchase the property.
- The purchase agreement: This is the contract to buy the home. If you decide not to purchase the property according to the purchase contract, the option money in most cases will become non-refundable.
Before you decide to move forward with a rent to own, you should look at both the pros and cons.
The Pros of Rent-to-Own
You Have Time to Improve Your Credit
If you need to improve your credit score, build credit history, or resolve errors on your report, this can provide you with the time you need.
You Get To Live In the Home
While renting the home, you can check out the local area, test your commuting times for work or school, and find out if the home has items that need to be addressed.
You Can Decrease Some of Your Upfront Purchase Costs
Since you will be familiar with the home, some purchase inspections may not be necessary. Your option money has also been set aside to offset your down payment and closing costs.
The Cons of Rent-to Own
Higher Monthly Payments
Rent- to-Own payments include the lease payment and the option to purchase payment. Be certain of your income and expenses so avoid it becoming a financial burden.
Non-Refundable Fees
If you are not ready to purchase the home by the agreed upon date, you may have to forfeit all of the option money unless you and the seller can come up with another agreement.
You May Overpay for the Home
If the economy changes, or prices drop, your agreed to purchase price may more than the home’s market value. This may require you to make up the difference to complete the home sale.
The Seller May Default
The seller may have financial difficulties which result in the property going to short sale or foreclosure before you can complete the purchase. This can also impact the option money you have already paid.
Is Rent-to-Own Worth It?
Rent-to-own can be a good option if you’re committed to buying, need time to improve your credit, have stable finances, and understand the terms—especially with guidance from a knowledgeable real estate professional. However, it’s not right for everyone. For some buyers, renting while focusing on credit repair may be a safer, more affordable path.
Before signing, review the agreement with a real estate professional, have an attorney examine it, confirm the seller’s financial stability, and make sure the terms align with your present finances and long-term goals.
With the right preparation and guidance, rent-to-own can open the door to homeownership when traditional buying isn’t yet possible.
