Who Holds the Mortgage in Rent to Own Homes?

A seller maintains the mortgage and deed in a rent-to-own situation.

A seller maintains the mortgage and deed in a rent-to-own situation.

A rent-to-own contract can provide a good housing option for you when bad credit, temporarily lower income or lack of a suitable down payment stand in the way of obtaining a traditional mortgage loan. Renting to own can also provide an answer if you want to buy a home but hope to test out the neighborhood before you fully commit to such a significant investment.

Definition

A rent-to-own contract allows a person to rent a home while also making payments toward the future purchase of the property. For example, a renter/buyer may agree to pay $1,000 a month to a home seller. Of that, $800 might go to the rent for the property, and the remaining $200 would go toward a down payment on the home. At the end of the contract term, such as one to five years, the renter/buyer would have paid up to $12,000 as a down payment.

The Seller

In a rent-to-own situation, the seller remains responsible for mortgages that exist on the property. This means the seller must continue to make payments on the mortgage, even if the rent-to-own buyer makes his payment late. This also means the rent-to-own buyer usually has few rights if the seller/mortgage holder fails to make her payments. In such a case, the mortgage lender could foreclose on the property and the renter/buyer could face eviction.

New Mortgage

A rent-to-own contract typically obligates a renter/buyer to purchase the rental property at the end of the contract term. If the renter/buyer obtains a loan, he purchases the property and becomes the new owner. If, however, bad credit or low income prevent him from obtaining a loan, he stands to lose the portion of his monthly payment that was allocated to a down payment on the property. Most rent-to-own contracts allow the seller to retain the down payment money if the renter/buyer fails to obtain a loan and purchase the property as agreed. In some cases, however, the seller might agree to extend the contract, renew it or create a new contract to give the renter/buyer more time to secure a loan. If the rent-to-own contract has been drafted as a lease-option deal, the renter may not be obligated to buy the property at the end of the term. If he decides not to buy, in such a case, he may receive all or a portion of the money paid toward the down payment back from the seller.

Alternatives

Sometimes, instead of a rent-to-own contract, a buyer and a seller will agree to a mortgage assumption. Essentially, this means the buyer takes over the original mortgage and continues making payments on it until the contract is satisfied. However, in most cases, a mortgage assumption requires the potential buyer to meet the lender's credit standards. Often, qualifying to assume a mortgage proves as difficult as obtaining a new mortgage, especially if the buyer has credit issues. In addition, some lenders may not agree to this option at all.

Recommendations

Rent-to-own contracts represent risks for both the buyer/renter and the seller. For this reason, it can be wise to take precautions such as having a lawyer review the contract before either side signs. Buyers/renters can also benefit by having an appraisal and an inspection performed on a property prior to signing a contract. In addition, a renter/buyer might benefit from meeting with a lender to determine the likelihood of obtaining a mortgage at the end of the rent-to-own contract and to get advice for boosting his chances for approval.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling
 

About the Author

Jordan Meyers has been a writer for 13 years, specializing in businesses, educational and health topics. Meyers holds a Bachelor of Science in biology from the University of Maryland and once survived writing 500 health product descriptions in just 24 hours.

Photo Credits

  • Stockbyte/Stockbyte/Getty Images