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If you’re currently renting but you’re eager to eventually purchase a home, you might be looking for the best, fastest path to homeownership. Taking out a mortgage and going through the traditional house-hunting process is one way to do it. But it’s not the only way.

And if you find a property you love but you’re not quite able to get a mortgage yet, rent-to-buy homes may be an option.

What's in this Article?


               What is a rent-to-buy home?      
               


                   

               


           




               Is a rent-to-buy agreement legal and legit?      
               


                   

               


           




               How do you qualify for a rent-to-buy home?      
               


                   

               


           




               Pros and cons      
               


                   

               


           




               When is a rent-to-buy agreement a good idea?      
               


                   

               


           




               Frequently asked questions      
               


                   

               


           



What is a rent-to-buy home?

Also known as rent-to-own homes, a rent-to-buy agreement allows you to lease a property you intend to purchase until you’re able to qualify for a mortgage.

“A rent to buy agreement is a lease agreement combined with a purchase agreement,” says Jordan Fulmer, real estate investor with Momentum Property Solutions in Huntsville, Ala. “It allows people who want to eventually move into homeownership an opportunity to occupy the house they want to purchase while giving them time to get their finances in order so that they can get approved for a mortgage loan.”

There are two types of rent-to-buy agreements, according to Fulmer:

  1. A lease-option agreement in which the tenant/buyer has the option to purchase the home within a certain amount of time but is not obligated to
  2. A lease-purchase agreement in which the tenant/buyer is contractually obligated to buy the home once the lease expires

In either type of contract, you will pay rent throughout your lease agreement. However, a portion of your rent payment may be applied to your future purchase, depending on the terms of your contract.

You may also owe a non-refundable “option fee” up front, which provides you the choice to purchase the property by a future date. This fee may be between 1% and 5% of the purchase price.

Run the numbers: Use our rent vs buy calculator to see if it’s time to become a homeowner.

Rent-to-buy agreements are completely legal and legitimate, although they may not be allowed in some states or areas, according to attorney David Aylor, CEO and founder of David Aylor Law Offices in South Carolina.

It’s important to work with a lawyer who has experience with rent-to-buy contracts to review all of the terms and make sure you’re clear on what you’re committing to, what you’re entitled to, and what your obligations are regarding the property.

“Some owners may try to create sneaky contracts that will maximize their profits and make you lose more than you bargained for,” Aylor adds. “You should always have a lawyer look over any rent-to-own contract before you sign or pay a deposit to ensure that you’re not getting the short end of the stick. If a deal seems too good to be true, it likely is.”

Know exactly what will happen at the end of the lease, particularly if you have a lease-option rather than a firm purchase agreement. Will there be room to negotiate if you’ve identified issues with the house as a renter? What if home values have decreased in the area, but you’ve already committed to a purchase price? These are things you should discuss carefully with your lawyer prior to signing the contract.

“You should always have a lawyer look over any rent-to-own contract before you sign or pay a deposit.”

David Aylor, CEO and founder of David Aylor Law Offices

How do you qualify for a rent-to-buy home?

To qualify for a rent-to-buy home, Fulmer says you’ll need to prove that your income is adequate to cover the monthly rent plus any other required expenses outlined in the contract. The owner or landlord will also likely do a credit check and may require verification of your employment status and income.

“Also, to be successful at this type of agreement, there needs to be a high likelihood that you will qualify for a mortgage loan within a year or two,” Fulmer says.

You may want to talk with a lender before you commit to a rent-to-buy agreement to ensure that they will approve a mortgage for this type of purchase and to find out what you need to do to qualify for a loan when the time comes.

Your lender may be able to recommend tips for improving your credit score or advise you on down payment and closing cost assistance programs in your area.

As you get closer to your purchase date, it’s smart to get preapproved for a loan. Then you’ll know whether you can afford the price of the home, as well as any requirements for the loan program you decide to use.

Related reading: How to Get a Good Credit Score and Why It Matters

What are the pros and cons of rent-to-buy homes?

The pros

Martin Orefice, CEO of Rent To Own Labs, says there are mutual benefits for both buyer and seller in a rent-to-buy agreement.

“The buyer has the chance to try out a property before committing to purchase it, which can be useful – especially with older properties,” he says. “In some cases, they may also get to avoid making a down payment on the home, which is a major obstacle to buying a home for many people.”

“The buyer has the chance to try out a property before committing to purchase it, which can be useful – especially with older properties.”

Martin Orefice, CEO of Rent To Own Labs

The seller, meanwhile, “gets immediate income from their property, even if the buyer doesn’t eventually follow through on the purchase,” Orefice continues. “They can also charge a premium simply for offering the option to buy, so a seller can do quite well for themselves here, even if the property doesn’t sell for a while. They further get the chance to evaluate a potential buyer’s reliability over several months before committing to a six-figure real estate transaction.”

Another possible advantage is that the buyer can lock in a home price at today’s values, if their contract stipulates a purchase price that can’t be changed if the value has appreciated by the time they buy the property.

“This allows them to walk into the home while it accrues equity in an appreciating market,” Fulmer explains. “A rent-to-buy agreement also benefits the buyer by securing a home while giving them time to work on their credit or save up for a larger down payment, if required.”

There’s also a greater incentive for the tenant/buyer to maintain the home during the rental period.

“The tenant/buyer will generally take better care of the property than a different average tenant because they’re actually planning to buy the house,” Fulmer says. “Plus, since property management generally isn’t needed with a rent-to-buy home, your cash flow as the landlord is usually higher than for a standard rental.”

The cons

There are a lot of potential benefits with rent-to-buy homes. But these can also be risky for buyers because if you decide not to buy the home, you cannot get your rental payments or option fee back. That’s money you could have used toward a down payment for a different house.

You may also be responsible for more maintenance expenses and responsibilities than with a standard rental contract, since you’ve committed to buying the home.

Keep in mind that rent-to-buy homes may be hard to find in the current seller’s market. Demand for houses is high right now, which means sellers often receive multiple offers on a property from homebuyers who are ready to purchase immediately. In those situations, they have little incentive to do a rent-to-own agreement that may not result in a sale.

Those who do offer rent-to-own property agreements may be reluctant to commit to a fixed purchase price, as home values are expected to see double-digit increases this year.

Rent-to-buy homes pros and cons

When is a rent-to-buy agreement a good idea?

The biggest winners in rent-to-buy agreements are first-time buyers.

“Both the chance to avoid a down payment and the opportunity to get maintenance help with a home for the first several months are great benefits to younger people who are just starting out with homeownership,” Orefice says.

The rent-to-own strategy also works best for those seeking to purchase a new home in the next year or two but who need a little extra time to get their credit score high enough to qualify for a mortgage.

“It can also work well for people who own another home but need time to move. They can wait until their old house sells to exercise their rent-to-buy option,” Fulmer adds.

Another scenario where a rent-to-buy agreement might make sense is for someone with relatively high student loan debt but a well-paying job.

“Their debt-to-income ratio* may not be low enough for a traditional lender at the moment, but after a few years, they will have paid down their debt enough to qualify for a mortgage,” Fulmer suggests.

That can be a great option if you’ve found your dream home but won’t be able to buy it until you’ve paid off more of your student debt.

Related reading: How to Buy a House in 11 Steps | 2022 Guide

Know before you rent-to-buy 

Rent-to-buy homes can be a smart path to homeownership if you’ve found the perfect property and don’t want to miss out but need a little more time before you buy.

But be sure to work closely with a lawyer and with your preferred lender to determine whether getting a mortgage at the end of your lease term will be possible. Your lender can also advise you on the options you have right now.

While your dream home may be out of reach, it’s possible that you could afford a different home at a lower purchase price – no renting necessary. In that case, you might opt to skip the uncertainties of a rent-to-own home and buy now so you can stabilize your housing payments and start building equity.

Rent-to-buy homes FAQs

Is signing a rent-to-buy home agreement a bad idea? Committing to a rent-to-buy agreement can lead to remorse if you are obligated to purchase the home once your lease period expires but you are not financially ready to do so. The portion of your rent that gets applied to the home’s purchase price is usually non-refundable, as are any upfront option fees required by the contract.

If you cannot, or choose not to, buy the home when your lease period ends, you will lose all of the money you put into it – which could have been put toward savings for a more suitable home.

Is a rent-to-buy home legit? Rent-to-buy agreements are legal, although experts strongly advise having an attorney carefully review your contract before signing. Be aware that some areas and states may not allow a rent-to-buy agreement, so talk to your real estate agent about whether that’s an option in your area.  

Is rent-to-own risky? Rent-to-own agreements can be risky depending on your finances and the terms of your contract. If you’re not confident that you will qualify for a mortgage or otherwise be able to buy the home at the end of a lease-purchase agreement, you could lose any upfront fees or any rental payments that would have been applied to the purchase.

Additionally, there are risks if the contract doesn’t stipulate a fixed purchase price. If the home appreciates significantly in value during your lease period, the sale price may be more than you can comfortably afford.

Qualify for a rent-to-buy home

If you’re considering a rent-to-buy home, or just want to know if you can afford to buy any home, it’s a good time to start.

Mortgage rates are still low and you might qualify or more than you think.

*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.

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