For the right would-be buyer, a rent-to-own arrangement can be an ideal path to invest in a future home purchase — a time to save money and improve credit, or wait for an expected shift in circumstances, while living in a home that will one day be yours.
“Rent to own could be an option for someone who just doesn’t have the ability to qualify to purchase right now,” says Ed Kaminsky, a top-selling Southern California-based agent with 34 years of experience.
“A buyer can save enough money for a proper down payment, or wait out an expected financial change — maybe they’re going to have a better job, get a raise, or maybe an inheritance. In time, they’re going to have the down payment.”
Indeed, rent to own can be a viable option for owning a house… but is it right for you?
In this expert-backed guide, we’ll walk you through the process of getting into a rent-to-own home as a buyer — step by step, from learning about how the process works to closing on that new home.
Step 1: Educate yourself
As with any home search, you’ll need to understand the market as you explore the possibility of a rent-to-own home arrangement.
Isolate the specific area where you want to rent to own, and collect your data, including:
- How much is typical rent?
- How much does it cost to buy?
- How does that translate into monthly mortgage payments?
- Apart from housing costs, what’s the cost of living otherwise, and how much is it possible to save with your income while you work toward homeownership?
Further, take time to learn more about this type of purchase. Importantly, know the difference between a lease option (which only obligates the seller to offer to sell you the house when the time comes) and a lease purchase agreement (which obligates both parties to the sale — so yes, that requires you to go through with it, too).
As with any real estate transaction — or any major transaction at all, for that matter — an informed buyer is one poised to come out ahead.
Step 2: Find a rent-to-own home
First, talk to a local agent who is experienced with rent-to-own transactions. These come with specific terms and conditions, and experience is key.
An experienced agent can help you by conducting specific MLS searches, consulting their real estate network, and through general knowledge of market and area trends. You also might consider going with an agent or brokerage with a dedicated rent-to-own program.
You might work with your agent to contact a seller directly. For instance, an experienced agent can help you identify listings that have been lingering on the market for a long time, whose sellers might be particularly interested in a rent-to-own setup where they can take in some extra cash monthly while moving toward an eventual sale.
On the flip side, you might work with your agent to find a landlord who wants to get out of ownership and has simply been renting as a way to carry costs while ultimately hoping to get clear of the property.
Finally, work your own network. Maybe someone in your sphere — perhaps a friend, neighbor, or co-worker — wants to eventually get out of ownership and would be open to a rent-to-own arrangement. Put your interest out there in conversation and on social media, and you might turn up the perfect option in your own community.
Step 3: Negotiate with the seller
When you rent to own, you won’t be writing an offer that the seller accepts like you would with a regular sale. Instead, this looks more like a rental contract with additional stipulations, so both parties will want to make sure you agree on what it says.
“Negotiations have to do with the market conditions and the seller’s motivation,” Kaminsky explains.
Consider these points for rent-to-own contract negotiations:
- What will the purchase price of the home be? How will you determine that? (Will you get an appraisal and ballpark future value growth, for example?)
- How much is the option fee? (This is an upfront payment that might or might not be credited toward your down payment when you buy.)
- How much will the monthly rent be? Will there be a rent credit that goes toward your down payment?
- When will that purchase take place? (One to three years is typical.) Is there a renewal clause that lets you extend the contract term if need be?
- Who’s responsible for maintenance while you’re renting to own? (Usually, it’s the buyer — unless the issue is major. “If there’s a roof issue or a plumbing issue, the owners generally respond,” Kaminsky says.)
- Will there be additional fees or expenses? (How about dues to an HOA, for example?)
- Are there any restrictions on how you can use the house while you rent it? (Say, no pets, or no gatherings larger than 10 people?)
Step 4: Have a lawyer review the contract
This is pretty self-explanatory, but you don’t want to skip it.
Make sure the language protects your interests — and that a lawyer signs off. To protect yourself, consider adding contingencies (such as an inspection contingency) that allows you to get an inspection before you occupy the house so you’re fully aware of any existing conditions. To that end…
Step 5: Order the inspection
As a renter, you typically wouldn’t do any formal inspection as part of your contract. But as a rent-to-owner, you really want to know what you’re getting into, and a home inspection is the best way to do that.
It’s important to know the home’s condition in order to assess the sensibility of making the deal on your end. The intel from an inspection can also be helpful if you’ll be taking on some or all of the home’s maintenance needs while renting.
Step 6: Pay the option fee
At this stage you’ll pay your option fee, also called a premium payment or option consideration. This is an upfront payment that may be credited toward your down payment when you purchase the home.
Step 7: Move in and pay rent
Sure, it’s always important as a tenant to pay your rent on time. But when you’re renting to own, missing payments could kill your chance of ownership: In some cases, a late payment could void the rent-to-own contract. And if that happens, whatever you’ve paid toward the price of the home is typically lost, too.
By the way, it’s not just late payments that can jeopardize your chances at this stage either: other issues that could trigger a default in a rent-to-own contract include violating a no-pets clause or failing to make repairs in a timely fashion, to name two examples.
Step 8: Work on your credit
If you’re renting to own so you’ll have better loan terms when you buy in a few years, start working on your credit in preparation.
“It could be a situation where your credit score is low, and it’s going to take you a year to fix it,” Kaminsky says. “Maybe you have the down payment, but you have to build your credit score back up from the 500s or whatever it might be. So maybe it’s a matter of working with a credit repair company, or just taking care of the problems you’ve created with due payments. Carving out time to get that cleaned up is the perfect reason to consider rent-to-own.”
The higher your credit score, the better interest rate you’ll be able to get when it’s time to secure your mortgage loan. (Lenders offer much better rates to buyers with excellent credit scores, and that translates to big savings over the life of the loan). Ideally you’ll have a credit score of at least 620 to qualify for a conventional loan, though you’ll likely need a 760 or higher to get the best terms possible.
Here are some among the doable ways to improve your credit score:
- Pay down — or pay off — high-interest loans
- Put bills on autopay or schedule them on your calendar so you don’t miss any
- Don’t close any unused accounts
- But do request a higher limit on your best account
- Try to pay off your balances in full every month
- Ask that your rent is reported to the major credit bureaus so you can build credit while you’re renting to own
Step 9: Save for closing costs
Don’t forget about saving for your closing costs. You’ll have to pay them at the time of closing, and they can surprise you if you’re not prepared.
Closing costs can run between 2% and 6% of the home’s purchase price.
Step 10: Ensure there are no title issues
Even if you had the title reviewed when you signed the contract, you don’t know exactly what’s happened with the seller financially since then… unless you check. So do so, and make sure the title is clean at this stage.
Step 11: Apply for a mortgage
At the end of your contract term, it’s time to apply for that mortgage you’ve been working toward by saving and improving your credit.
When you apply, provide your lender with documentation for the premium payment and rent credits that you already made to the seller, in addition to the original purchase contract, the original appraisal (if you have one), and any inspections that were made during this time.
If the purchase price is significantly higher than the appraised value, you’ll have to go back to the seller to negotiate — or come up with the difference — because a lender is unlikely to approve a loan for more than the home is worth.
Step 12: Buy the house
Improved financial picture: check. Mortgage loan: check. Close on that new home: check.
You did it! Congratulations on homeownership.
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