A common option to purchasing a home is referred to as a rent-to-own (lease or lease-to-own) agreement. A buyer who goes into a contract like this agrees to pay the rent for a particular property within a preset duration, before deciding whether they want to purchase it on or prior to the expiration of the lease.
A rent-to-own agreement can be a perfect option for those who would like to own a home yet are not qualified for a mortgage, or those who are hardly prepared for the demands of ownership. Say you have a bad credit score, but this is only because of temporary issues that are now behind you, and you have been doing fairly and consistently rebuilding your credit ever since. Perhaps your debt-to-income ratio is excessively high, but not by a lot, and your budget can accommodate extra payments and decreasing your debt substantially over the next few years.
You may have a job that pays really well, or landed a new job where the salary is higher, but because you’ve only been there less than a year, your lender does not consider your income stable enough. Likewise, you may be successfully self-employed, but lenders think your track record is not enough to make them comfortable. Or you may have saved some money but it’s still enough to cover the typical down payment for a home, which is usually around 20% of the purchase price.
If any of the above is true to your situation, renting to own could be your best option. You can lock down a house that you like now while you improve your credit score, extend your employment or business background, add to your savings or do whatever other things that will increase your chances of getting a mortgage. And, in case the option money or percentage of the rent comes close to purchase price, you can start to build some equity at the same time.
To make a rent-to-own agreement work, potential buyers have to be sure that they are prepared to make the purchase as soon as the lease expires. If you honestly think there’s more than a 50% chance that you will move out and not proceed with the sale, think twice. Finding a landlord or owner who agrees to refund rent credit and the option fee so you can move when you want to, is highly unlikely.
If you honestly believe there’s a chance for you not to get qualified for a mortgage or any other type of financing by the time the lease expires, you should continue renting with a typical lease, improving your credit, and saving money for a down payment. And when you’re fully prepared, you can pick any house on the market that aligns with your needs, aesthetics and budget.