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.
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.
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.
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.
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.
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.
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.