I’d like to buy a home; I can afford monthly payments, but I’m working on my credit. I saw an ad for a rent-to-own. Is that something I should consider?
The short answer is maybe. Rent-to-own arrangements sometimes make it easier for someone to buy a home.
A typical rent-to-own is a type of rental arrangement that also contains an option to purchase the property in the future, at a specific point in time, at an agreed-upon price. Rent-to-own contracts give buyers time to save a larger down payment, and time to work on their credit, but there are some risks.
Rent-to-own contracts are very complex. There are many things on which the parties have to agree, for example:
- who arranges and pays for property insurance during the term of the rental?
- who will pay property taxes and/or special assessments during the term of the rental?
- can the renter complete renovations or improvements before purchasing the property?
- what happens if the buyer cannot close?
- is the accumulated down payment refundable or non-refundable?
Often rent-to-own contracts will include a base rent for the property as well as an additional monthly payment. Your rent-to-own agreement should stipulate that your additional monthly payment will be held in a trust account until purchase as it will form part of your eventual down payment.
It’s not unusual for there to be clauses in rent-to-own contracts that state if the buyer misses a payment, is late with a rent payment, or chooses to back out of the purchase, the property owner is entitled to keep any down payment funds already received. It’s a good idea to talk to a mortgage broker because they can help determine if you will qualify for a mortgage at the purchase price. If they have concerns about your ability to obtain a mortgage, whether because of your income or your credit, you may not want to proceed.
Something you also need to consider is that property values change constantly. When you enter into a rent-to-own agreement, you agree to purchase the property at a specific price at a point in the future. But there is no guarantee the property will be worth that amount when you go through with the purchase. Are you prepared to take on that risk? Likewise, if the property value drops significantly—and your purchase price is too high—it may be difficult to find a lender.
The best advice I can give you is that before signing anything, it’s a good idea to have a lawyer review the contract. While a rent-to-own may make it possible for you to purchase a property, you need to make sure you understand and agree with what you are signing.