We\u2019ve researched the ins and outs of rent-to-own homes<\/a>, as well as talking to experienced real estate agents about how a renter and landlord can enter into such an agreement, the pros and cons of doing so, and just what it means for you as a buyer if you decide to rent-to-own.<\/p>\n Let\u2019s take a look at everything you need to know about rent-to-own homes<\/a>.<\/p>\n Simply put, a rent-to-own house<\/a> is one that is currently being rented, and the owner gives the tenants an option to buy it after they\u2019ve lived in the house for a certain amount of time. But the process itself isn\u2019t necessarily that simple, or even that common.<\/p>\n Rent-to-own homes<\/a> aren\u2019t for everyone, but they can be a good option for some buyers, especially those who have low or no credit, or who don\u2019t have a lot of money saved yet.<\/p>\n New Mexico agent Valerie Almanzar<\/a>, who has more than 15 years of experience in the real estate industry, says that while rent-to-own properties aren\u2019t the norm these days, they can and do still happen. \u201cIf the owner is looking to put the property on the market at some point and has a tenant in place who wants to buy, they might consider a rent-to-own.\u201d<\/p>\n When it comes to a standard rent-to-own agreement<\/a>, it\u2019s really up to the buyer and seller to decide the terms they want attached to the deal. Most agreements stipulate that the buyer will rent the house for anywhere between one and three years before purchasing it, and the sales price is usually set at the time of the agreement.<\/p>\n The buyer will also often have to pay an upfront deposit toward the down payment, which is nonrefundable if they change their mind. Additionally, a certain amount of the monthly rent is also typically stipulated to help cover the buyer\u2019s closing costs<\/a> or down payment.<\/p>\n \u201cThese types of agreements usually have a predetermined time limit, like a year,\u201d says Almanzar.<\/p>\n \u201cFor example, monthly rent on the house is $2,000, and the buyer agrees to pay an additional $300 a month, which will go toward closing costs on the purchase.\u201d<\/p><\/blockquote>\n Buyers may also be responsible for all maintenance and repairs of the property for the duration of their lease.<\/p>\n Buyers should also continue to save separately, as the rental amount that goes toward closing costs or down payment probably won\u2019t be enough to cover everything. They\u2019ll also need to come up with any additional buyer-designated costs associated with the purchase, which can vary by state and loan programs.<\/p>\n Another decision is whether to use a lease purchase agreement (not recommended for buyers) or a lease option to purchase \u2014 which still provides the tenant with the possibility of buying.<\/p>\n In a lease-option agreement, a clause is added to the lease that states the tenant will get the first right of refusal if the owner decides to sell the property.<\/p>\n This can be good if a tenant already loves the home they\u2019re renting and wants a chance to buy it while continuing to save for their purchase. The seller can determine the terms of the option, which may or may not include a pre-set purchase price for the home.<\/p>\n A lease purchase means that the buyer will be obligated to buy the house at the end of the contract \u2014 it\u2019s not an option anymore.<\/p>\n The lease purchase can be a \u201cbuyer beware\u201d situation. If a buyer decides they don\u2019t want the house, it can actually be considered a breach of contract, with serious repercussions.<\/p>\n While getting an inspection<\/a> on a house before you buy it is always a good idea, it doesn\u2019t mean the seller will be responsible for any needed repairs.<\/p>\n \u201cSometimes a buyer and seller agree that the home inspection can be waived since the buyer has already been living in the home and probably knows of any issues,\u201d says Almanzar. But if you\u2019re buying, you might want to spend the money on an inspection anyway, just so you\u2019re fully aware of the home\u2019s condition and can make an informed decision on the purchase. And that\u2019s something you should probably do before you sign the agreement.<\/p>\n Qualifying for a mortgage isn\u2019t affected by renting to own, and, says Almanzar, having a little extra time could even be a good thing.<\/p>\n \u201cThe buyer has time to build credit and establish a rental history.\u201d<\/p><\/blockquote>\n A mortgage lender will still want buyers to meet all the standard qualification requirements, including adequate credit, employment, and debt-to-income ratio<\/a>.<\/p>\n Buyers should also be aware that even if they have an agreement with the seller that inspections aren\u2019t needed, mortgage lenders will still require an appraisal of the property to determine the value of the home. And if that appraisal comes in lower than the purchase price<\/a>, the buyer and seller will have to negotiate the cost difference.<\/p>\n According to Almanzar, a rent-to-own agreement can be helpful for a buyer<\/a> who needs to work on their credit, save \u2014 or, if they just started a new job, to build a work history. Sellers also can benefit, she says: \u201cThey have a person living in the home that intends to purchase it, which will hopefully help them take good care of the property while they are renting.\u201d<\/p>\n Sellers who don\u2019t want the hassles of putting their house on the market, having prospective buyers traipse through their property, or potentially waiting for the perfect offer might like the idea of a rent-to-own<\/a>. In certain markets, they might even find it to be a better option than trying to sell, as they already have buyers who want to own the property.<\/p>\n As a buyer, renting-to-own<\/a> means you get a chance to try the house on for size before you buy, which can be helpful if you aren\u2019t sure what kind of house will best suit you. And if the sales price of the house is pre-set, you might also get a little bit of instant equity if home prices go up more than expected during the year or years that you\u2019re renting the place.<\/p>\n For sellers, the drawbacks of a rent-to-own agreement<\/a> can include having buyers back out of the deal when it comes time to purchase the home.<\/p>\n \u201cThere is a high percentage of people who don\u2019t go through with the purchase,\u201d says Almanzar. \u201cThe buyer might change their mind after looking at other properties \u2014 or, since many people go with a rent-to-own because they need to get credit or finances in order, sometimes they simply aren\u2019t able to do so in time to buy.\u201d<\/p>\n Backing out<\/a> can also mean some serious repercussions for buyers, as they are likely to forfeit any deposits they\u2019ve made toward the house, as well as extra money paid toward closing costs. Buyers should also be aware that things like late rent payments can affect their contract; some contracts have clauses in which the buyer can lose their entire deposit if they are late on their rent.<\/p>\n If the price of the home<\/a> is determined in the initial rent-to-own contract, a changing market could mean losses for either party. If the home\u2019s value goes up, the seller can lose money on the sale. If prices go down, the buyers not only don\u2019t get the best deal on the home but there is the possibility of the appraisal coming in lower than the sales price, which could mean the buyer will have to come up with more cash.<\/p>\n![\"\"](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/what-is-rent-to-own-house-kids-666x381.png\")
<\/a>So, what is a rent-to-own house, anyway?<\/h2>\n
How do rent-to-own contracts work?<\/h2>\n
Lease-option agreements<\/h3>\n
Lease-purchase agreements<\/h3>\n
![\"Don't](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/what-is-rent-to-own-house-inspect-666x381.png\")
<\/a>What about the appraisal and inspections? And getting a mortgage?<\/h2>\n
Pros of a rent-to-own<\/h2>\n
![\"There](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/what-is-rent-to-own-house-backing-out-666x381.png\")
<\/a>The downsides of renting-to-own<\/h2>\n
How to find rent-to-own homes<\/h2>\n