Rent-to-Own Homes: Your Guide to the Process

If you’re someone who likes to plan ahead, a rent-to-own home agreement may be the right choice for you. The path to homeownership can be long, that’s why some prospective homeowners are considering a rent-to-own property, which would allow potential buyers time to live in the home first, operating like a long-term lease, while building credit and a down payment to be used for the purchase of the home several years down the line.

How Do Rent-to-Own Homes Work?

When you rent to own, the money you’re putting towards rent partially goes towards a down payment. Before your lease starts, either a lease-option agreement or a lease-purchase agreement is signed. Traditionally, most homeowners take out a mortgage first before buying a home, but in a rent-to-own situation you can go through the process of securing a mortgage later into the rental period while building credit but prior to purchasing the home.

What to Know About the Rent-to-Own Home Process

Nonrefundable Upfront Fees

When considering a lease-option or lease-purchase agreement, be aware that you’re required to pay an option fee upfront to the homeowner that can range from 2-7% of the home purchase price. This is a nonrefundable fee, so if you decide not to purchase the home, you’re out the money you paid.

Types of Rent-to-Own Contracts

When it comes to rent-to-own contracts, there are two main agreement types.

Lease-Option Agreement

A lease-option agreement works as it sounds; at the end of your lease, you have the option to buy the home. This allows you time during your rental period to make up your mind. Perhaps you realize you don’t like the area, or you’re not quite ready to be a homeowner. In this situation, there’s no penalty for not purchasing the home at the end of the lease agreement, although you do forfeit the right to the option fee you paid upfront as well as any rent credit that was paid throughout the rental period as a down payment fund.

Lease-Purchase Agreement

A lease-purchase agreement means at the end of the rental period you have an obligation to buy the home. Before you sign the lease-purchase agreement, negotiate on the home price and have an assessor come through to ensure you know what you’re expected to pay. While renting, take this time to boost your credit score and review your mortgage loan options.

Negotiating a Purchase Price

Before you sign a lease-purchase agreement, make sure you have the purchase price set. This way there aren’t any surprises when you’re ready to purchase the home. Negotiating a purchase price upfront will provide you and the seller clarity and can be beneficial for the buyer (you) if the housing market is trending upwards.

Applying Rent to the Principal

When renting to purchase, your monthly rent payment will likely be higher than other rentals around the area to allow a portion of your rent to be set aside for a down payment. This will help you trim down the principal amount of your mortgage loan before the end of your lease.

Maintenance Responsibilities

Before you sign a lease-to-buy agreement, make sure you review the home maintenance responsibilities for the rental period. The maintenance responsibilities are the landlords’ but in a lease-to-buy agreement it’s possible they expect the renter and future homeowner to take on the physical upkeep and repairs. When reviewing the fine print, be sure that the distribution of responsibilities is clearly outlined in the contract. Make sure instances like large home repairs (new roof, flooring, etc.) are covered by the landlord as they are currently the homeowner and should cover those expenses. Don’t forget, while you’re renting you’ll need renters insurance to cover your personal property.

Buying a Rent-to-Own Home

If you’re set on purchasing your rental home, make sure prior to the end of the rental period you’ve qualified for and secured a mortgage if you’re not paying for the home out of pocket. You’ll need these funds available in order to buy the home. As you’re renting, ensure you’re setting extra funds aside for a down payment. With a larger down payment, you can cut down on the amount of money you need to borrow, providing you more equity in the home and a lower monthly mortgage payment. Remember, the law around a rent-to-own home agreement may be different depending on where you live. Before signing an agreement, you should consult with your attorney and tax advisor to ensure you understand the agreement plan.

Pros and Cons of Rent-to-Own Agreements

Pros:

• More time to save for a down payment
• Negotiable terms
• Live in the home before buying
• Build credit

Cons:

• Option fee
• Higher monthly rent
• Home maintenance responsibilities
• Hard to back out of a lease-purchase agreement
• May not be approved for a mortgage loan

Coverage for Now and the Future

Whether you’re renting or buying, Farm Bureau has affordable coverage options to protect your home and property. Connect with a local Farm Bureau agent to start the conversation about homeowners and renters insurance today.