Rent to Own Home Meaning
Rent-to-own home is an arrangement, through the form of an agreement, where the tenant has the option of buying the property, home in this case, upon the expiration of the rental or lease agreement following which the home becomes tenant’s property subject to clauses in the agreement.
- Rent-to-own is also known as rent-to-buy or rent-to-purchase option. In a typical rental agreement, the right to rent expires upon the termination of the agreement. In case of a rent-to-own agreement, the tenor extends to the tenant the option of buying the rental home after the expiration of the agreement. It should be noted that such schemes may vary depending upon the type of agreement and the clauses involved.
- This scheme of property ownership is as old as 70 to 80 years beginning first in the United Kingdom followed by the United States.
How Does It Work?
The rent-to-own arrangement comes with legal agreements of different sorts. However, in general, there are two main agreements: lease and option agreement. The agreement is between the house owner and the tenant (the buyer). Following are some of the factors that can be incorporated in the deed of the agreement –
- Purchase price: This is the price for which the buyer is ready to purchase the house.
- Credit quality: Since the agreement is between two parties, the quality of credit can be important because of the features like down payment, rent credit, and rent payments
- Duration of agreement: The time for which the rent-to-own agreement stands legal. If the buyer fails to make payments, as prescribed in agreement, the owner can claim termination. Even if the option period expires, the buyer loses all rent credits and related fees paid.
- Responsibilities related to rent-to-own-home schemes are, most often, explicitly mentioned in the deed that binds the buyer and the seller. Responsibilities such as transaction fees, maintenance fees, repair costs, community regulations, municipal facilities, and duties are only some of them.
- It is noteworthy that the aspect of responsibilities in the agreement is as much as important as the financial aspects. Even if the buyer duly pays rents and installments of the purchase price, the seller can sue him if the other parts of the agreement are grossly violated.
Rent to Own Home with Owner Financing
Owner financing is a mechanism wherein the owner of the property (home in this case) finances the property for the buyer. This means that the buyer agrees to pay a specified amount, made up of principal and interest through the loan, to the owner.
Alex wishes to purchase a home that is worth $500,000. He knows he can put down $100,000 upfront to secure the property. Unfortunately, he is unable to raise a loan of the remaining $400,00. The homeowner agrees to do this for Alex and raises a loan. Thus, Alex pays the principal plus the interest on the loan raised by the owner, known as owner financing.
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Rent to Own Home vs Mortgage
A mortgage is an arrangement by which the lender secures his loan or financing by legally binding the borrower to pledge real property as collateral.
- John wants to purchase a home for his family in an uptown locality that will cost his $500,000 today. If John uses the rent-to-own scheme provided by the new homeowner, he will have to make down payment upfront as well as pay installments of money that comprise both rent and rent-to-own charges (Remember! He will have to pay more than just the rent to own the home after the rent-to-own is applied and his rent tenure expires).
- On the other hand, John has an old house that can be used as collateral for the new home loan. John works out the equated monthly installments (EMIs) that he will have to pay if his mortgage qualifies for a loan. It turns out that if he pays EMIs instead of monthly rents, he is better off taking a home loan.
- Thus, more often than not, a mortgage can be a better option for purchasing a home. The only drawback is that it requires the borrower to pledge collateral which can be risky given no such requirement in rent-to-own schemes. However, the premium rental payments in rent-to-own can be cumbersome as well.
- Rent-to-own is a good option for buyers who do not qualify for house loans either due to financial issues or credit issues
- Rent-to-own schemes allow buyers or more specifically tenants, the downtime to arrange for finances upon which the scheme can be used after rental agreement expires
- Rent-to-own also gives a tenant the opportunity to gauge the living experience which he/she gets during the rent period, which in this case can be loosely called the trial period.
- Some rent-to-own schemes can be a costly affair. This happens because rent-to-own schemes come with payments that renting party makes other than usual rent
- The rent-to-own scheme often binds the renting party in the agreement the conditions of which become obligatory during the rental period. This can become burdensome sometimes
- Rent-to-own schemes narrow down options for renting party. In case of him signing the agreement upfront, any favorable variations in home loans or property prices become a missed opportunity for the tenant who has already signed a rent-to-own agreement.
Rent-to-own home is a common way by which the buyer can approach to purchase the house. Other names like lease-to-own or lease option are common. A lease agreement binds the buyer with the renting payments while the option agreement offers the privilege to buy the house at his will. Both agreements may vary subject to the needs of the involved parties.
Rent-to-own is a mutual agreement between the tenant and the landlord. Thus, variables like purchase price and rents, and agreements like leasing and owner-financing are subject to mutual agreement. Such deals are prone to falling apart if the creditworthiness and legal aspects are not duly fulfilled.
This has been a guide to rent to own home and its meaning. Here we discuss responsibilities, owner financing, and how does rent to own home works along with advantages and disadvantages. You may learn more about financing from the following articles –