How to Rent to Own a House

Whether you have fallen on hard times or simply are unprepared to purchase a home right now, you have other options. One such option is renting to own. You are probably more familiar with the idea of rent to own stores that offer appliances and furniture, but you can also rent to own a home these days.

As housing prices and unemployment continue to increase (as of August 2020), more Americans cannot afford to purchase a home. That doesn’t stop them from dreaming of homeownership. In these cases, the potential homeowner can look for opportunities to rent to own a home while they save up money for a down payment or repair their credit.

If renting to own sounds like an idea you’d like to pursue, then you need to know how it works. Like most things in real estate, there are pros and cons, but having a clear understanding of what you are getting into will make a big difference. Here we will discuss the most popular topics on rent to own homes so you can decide if this is the right type of real estate transaction for you.

1. What You Need to Know to Rent to Own a House

In order to buy a home, you have to be approved for a mortgage. If you do not have money for a deposit or a good credit score, then you likely cannot purchase a home the normal way. If that is your situation, don’t feel bad. Industry statistics show that 36.6% of households are renting their homes. Many of these households are renting to own.

Essentially, when you rent to own a home, you complete a rent to own agreement. As part of this agreement, you get to move into the home and pay a monthly rent. Part of this monthly rent goes towards your future down payment on this particular house. At the end of the agreed upon rental period, you are given the option to purchase the home.

With a rent-to-own agreement, the buyer pays a deposit fee, in addition to monthly rent and rent premiums. Basically, the monthly rent pays the seller’s mortgage, and the rent premiums go towards buyer’s down payment when it is time to purchase the home.

There are different types of rent to own agreements, including a lease option and a lease purchase. It is critical that you understand what type of agreement is on the table before you sign the contract because if you don’t, you could find yourself in legal trouble.

A lease option gives you the opportunity to purchase the house when the lease ends; however, you are not obligated to buy the house at the end of the lease. In contrast, if the rent to own agreement is a lease purchase than you are legally obligated to buy the house when the lease ends.

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However, a rent to own agreement is not the only way you can move into your dream house without a full down payment. Another option is a contract for deed. A contract for deed is an alternative means of financing a real estate purchase.

In this situation, the home buyer agrees to buy the home by paying monthly installments to the seller. The buyer takes possession of the home with full occupancy rights (the buyer is the homeowner in every way). However, the seller keeps the title until the terms of the contract for deed have been fulfilled.

In Buy a House: Understand the Contract for Deed Option, we explain, “Most Sellers will only consider a balloon loan [in a contract for deed]. What that means is the Buyer will have anywhere from 3-5-7 years of fixed principal and interest payments. The monthly mortgage payment will amortize over a 30 years period but after the 3-5-7 years terms is up, it will turn into a balloon payment. The Buyer then has to come up with the remaining (often large) balance to pay the Seller.”

It is important to understand that the contract for deed option is not the same as a rent to own agreement. One clear difference is that in a rent to own agreement, the buyer is still seen as a tenant, whereas with a contract for deed option, the buyer is seen as the homeowner.

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2. How a Rent to Own a Home Agreement Works

If you think a rent to own agreement is the right option for your personal situation, here are the steps you need to take.

1. a. Find a rent to own home. Generally, rent to own homes are harder to find because they aren’t listed like other homes. A realtor may know of a seller who is willing to do a rent to own agreement – especially if the home has been sitting on the market for a long time. There are also websites that list homes available as rent to own, such as Rent to Own Labs.
2. b. Sign a rent to own agreement. Once you find a home you would like to rent to own, you have to enter a legal agreement with the seller. This agreement will either be a lease option or a lease purchase. As we mentioned earlier, it is critical that you know the difference.
3. c. Set a purchase price for the home. Ideally, the home seller will already have a purchase price listed, but you may be able to negotiate the purchase price as you would in a traditional sale.
4. d. Pay an option fee. The buyer (or tenant) will pay an option fee as part of the rent to own agreement. It is typically around 1-5%, and it gives the tenant the option to buy the home when the agreement ends. This option fee will be applied to the final purchase price.
5. e. Decide the length of the rental terms. The tenant and the landlord (the home seller) will need to determine the length of the rental term. It is in the tenant’s best interest to choose the amount of time they will need to be in a better financial place in order to secure a mortgage to purchase the home. Generally, these agreements are from 1 to 3 years.
6. f. Clarify maintenance roles. Unlike traditional tenant and landlord situations, you may be required to do more maintenance as a tenant than you would in the other situation. This is because you plan to call the home your own one day. This is why you need to clearly state in the rent to own agreement who is responsible for maintenance issues.
7. g. Pay rent towards a future down payment. You will also need to define your rent and rent premiums. Essentially, your rental rate will cover the mortgage for the month and then some. In addition to the standard rent rate, you will need to pay a premium, which will go towards your future down payment on the home.
8. h. Apply for a mortgage. When it is close to the end of your rent to own agreement terms, you will need to apply for a mortgage to purchase the home. In contrast, if you decide not to purchase the home, you will likely forfeit much of the money you spent renting the home.

3. Yes, You Can Rent to Own a House with No Credit Check and Even If You Have Bad Credit

A major reason why some people choose a rent to own agreement is they have no credit or poor credit. In a rent to own situation, the potential homebuyer does not need to have a credit check to enter into the agreement. Instead, the potential homebuyer can use the time they are renting to prove their ability to establish a solid payment history.

With this being said, rent-to-own agreements work well for buyers who have credit problems, but have a plan to improve their credit over the next year or two (during the agreement) so they can later be approved for a conventional mortgage. Once the potential homebuyer has improved his or her credit score, then they have a better chance of being approved for a mortgage.

Unfortunately, just entering a rent to own agreement doesn’t mean you are on the way to credit repair. Even if you make all your rent payments on time, your credit score may remain the same. This is because these payments aren’t typically reported to the credit bureau.

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That doesn’t mean it is impossible. Many potential homebuyers use a rent to own agreement to improve their credit score, lower their debt, and save enough for a down payment. While you are renting, the potential homebuyer should focus on improving their entire financial picture, including paying off credit card debts and making regular payments. If you can repair your credit score, it means you will be able to get approved for loans and receive lower interest rates.

Just remember – Rent to own agreements generally have a significantly higher rent since you are paying traditional rent payments, in addition to premium rental rates. Make sure you have enough money to cover the higher rent, as well as enough to improve your financial picture.

If not, you will find yourself in the same financial situation you were in originally and will still not be able to purchase the home. Additionally, this means you will lose any money you put into the house (including the option fee).

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4. Who is Responsible for Repairs on a Rent to Own House

One of the big differences between traditional rentals and rent to own agreements is who is responsible for repairs on the home. In traditional rentals, the homeowner is the landlord. Since the landlord owns the home, he or she is responsible for repairs to the home. However, rent to own agreements are a little more complicated.

Ultimately, who is responsible for home maintenance is defined in the contract. That’s why potential homebuyers and tenants need to read the fine print. Home maintenance includes everything from general landscaping to major repairs. Often, the tenant will be asked to mow the lawn and do basic repairs, but the landlord will be responsible for things like replacing a water heater.

Keep in mind that since you are not only a tenant but a potential buyer, the seller or landlord may expect you to do more than you would in a traditional rental. Since you plan to call the rental house your home one day, you may be expected to do basic cosmetic work and appliance repairs. For example, rather than calling the landlord when you have an issue, you may be expected to call a repairman.

Before you sign a rent to own agreement, make sure the contract clearly indicates who is responsible for maintenance and repairs.

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5. The Details You Need to Rent to Own a Tiny House

Tiny houses are all the rage and they continue to grow in popularity for a multitude of reasons. Saving money is at the top of the list. Due to their tiny size, the living expenses are significantly less. For example, the average price of a full-size house in America is $272,000, but a tiny house only runs between $20,000 to $60,000.

This means monthly mortgage payments on tiny homes are much less than full-sized homes. So, if you are in bad financial shape and want to achieve financial freedom, you may want to consider a tiny house.

Even more appealing for those with bad credit or low funds is that you can also rent to own a tiny house. The process works very much like a traditional rent to own agreement. However, there are some differences.

For example, it may be more difficult to find a rent to own tiny home. Essentially, you will need to search for tiny homes for sale or rent, and then reach out to the seller to see if they are open to a rent to own agreement. Since it is difficult to sell a used tiny house, many sellers are open to this type of arrangement.

At the end of your rent to own agreement, you will have the opportunity to purchase the tiny house. If you have improved your financial situation, this could be an excellent way to gain financial freedom. Statistics suggest that tiny house owners have 80% less debt than the average American and 50% have money saved.

6. Who Does Rent to Own Homes Work Best For?

Renting to own a home doesn’t work for everyone, but there are some groups of people who can really benefit from this time of agreement. Those who have a low credit score or don’t have enough money for a down payment can give themselves time to improve their financial situation while renting and living in the home they hope to own.

Renting to own also works well for those who know where they want to live, such as a certain school district. Ideally, these situations work best for those who want to put down roots but don’t have the financial ability to do so at this time.

In contrast, rent to own home agreements do not work well for people who don’t make enough money to be approved for the mortgage of the house. If you rent to own a home that you know you won’t be able to afford in the end, you will end up spending and losing much more money than if you did a traditional rental.

Additionally, those without a clear plan for improving their financial situation are not the best fit for rent to own home agreements. This is because they will find themselves unable to secure a mortgage to purchase the house when the agreement ends. This can turn into a vicious cycle.

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Overall, the Choice is Yours – The difference between a traditional home sale and a rent to own agreement is that the seller agrees to allow the potential buyer to move into the home and pay a monthly rent.

Generally, this occurs because the potential home buyer cannot get a mortgage, and the seller may be struggling to sell the home. With a rent to own agreement, the potential home buyer moves into the home and pays a monthly rent with a portion of that rent going towards a future down payment.

If the rent to own agreement is a lease option, it means the buyer will have the option to buy the home when the rent to own agreement is complete. If the rent to own agreement is a lease purchase, it means the buyer is legally obligated to purchase the home once the contract ends.

Ultimately, rent to own can be a good choice for those without the ability to get a mortgage approval, but with a plan to improve their financial situation. Additionally, since they are not the homeowner, they may be off the hook when it comes to paying for expensive repairs.

In contrast, the contract for deed option also allows the buyer to pay the seller in installments, but the buyer becomes the homeowner in every way (including covering the costs of repairs).

Each are legitimate options for potential homeowners. The choice is yours.