Definition
A Rent to Own Home is a lease agreement where the tenant has the option to purchase the property at the end of the lease term. The renter pays an upfront fee (option money), and a portion of the monthly rent goes towards the future purchase of the house. The purchase price of the house is usually set in the lease contract, and the tenant decides at the end of the lease whether or not to buy the home.
Key Takeaways
- Rent-to-Own Home is a housing arrangement where the tenant rents a home for a specific time period with the option to purchase the house before the lease expires. This is done through a contract that includes rental payments and additional payments that will go towards the home’s purchase price.
- The Rent-to-Own Home agreement has two main components which are “Option Money” and “Rent Premium”. Option Money is an upfront payment that the tenant makes to the home owner. This is non-refundable but can be put towards the home purchase. Rent Premium is a portion of the monthly rental payment that also goes towards the home purchase.
- Rent-to-Own Home can be a viable option for individuals who do not have the financial capacity to purchase a home outright. However, it’s vital to note that missing payments or failure to purchase the house at the end of the lease could result in losing money already invested and eviction from the home.
Importance
The finance term “Rent to Own Home” is significant because it refers to an agreement in which the renter can purchase the property after a set period of renting time, typically within three years.
This is a valuable option, particularly for those who can’t qualify for a home loan due to low credit scores or insufficient savings for a down payment.
The renter pays an option fee at the start of the lease, along with higher-than-normal rent, with a portion of these payments serving as a down payment for the future purchase of the property.
Therefore, a rent-to-own arrangement can provide a feasible pathway to homeownership for individuals who are currently financially marginalized.
Explanation
Rent to Own Home is a specific type of agreement that serves the dual purpose of renting a house and an option to buy the said property at a future date. This arrangement often comes into the picture when a prospective buyer is interested in a property but is not in a position, due to financial constraints or other reasons, to purchase it outright at that moment.
This gives the buyer, also referred to as the tenant, the convenience of living in the house while also progressively working towards buying it. The entire mechanism of the Rent-to-Own Home concept works off pre-decided terms and conditions agreed upon between the seller and prospective buyer.
The buyer pays the seller a one-time, typically non-refundable, upfront fee called ‘option money’, and thereafter continues to pay rent. The contract often includes a percentage of these rental payments going towards the final purchase price of the home.
This allows the prospective buyer to gradually invest in the house while getting a feel of living in it. It can be particularly beneficial for individuals with less-than-ideal credit ratings or those who need more time to muster the requisite funds for a full payment.
Examples of Rent to Own Home
Example 1: Jared is looking to buy a home but doesn’t have enough for a down payment. He enters into a rent-to-own arrangement with a property owner. He pays $1200 a month, with $200 going towards the purchase price of the home. After five years, he’s contributed $12,000 towards the purchase price and is in a better position to buy the home with a mortgage loan.
Example 2: Sarah is a homeowner looking to sell her property. She struggles to find an immediate buyer but needs to move out of state due to a job relocation. She enters into a rent-to-own contract with a tenant, agreeing that a portion of their rent will go towards a down payment if the tenant decides to purchase the home within the next three years. This way, Sarah assures she’s getting income from her property and potentially a seamless sale to a committed buyer.
Example 3: Mike has a poor credit history, which hinders his ability to secure a traditional mortgage. He finds a willing owner who agrees to a rent-to-own contract for a period of three years. This period allows Mike to both save for the down payment and improve his credit score, after which he can secure a mortgage to pay off the remaining balance of the home’s purchase price.
Rent to Own Home FAQ
What is Rent to Own Home?
Rent to own home is an agreement in which you rent a home for a certain amount of time, with the option to buy it before the lease expires. These types of contracts allow you to pay rent each month, with a portion of it going towards the down payment of the home if you decide to buy.
How does a Rent to Own Home agreement work?
A rent-to-own agreement works by setting a lease period (typically 1-3 years), during which the tenant will rent the home. Part of the rent paid by the tenant during this period will be set aside for the future down payment if the tenant chose to buy the house at the end of the lease term. If the tenant decides not to buy, the money set aside from the rent is typically forfeited.
What are the pros and cons of Rent to Own Home agreeements?
The benefits of a rent to own agreement include the opportunity to test drive living in the home before deciding to buy, a way to save up for a down payment, and the potential to lock in a purchase price. The potential downsides include higher monthly payments compared to traditional renting, the risk of losing money if you don’t end up buying, and the possibility of still not being able to afford the house at the end of the lease term.
Who is Rent to Own Home applicable for?
Rent to Own Homes are applicable for individuals who are interested in buying a home but do not have the necessary credit or upfront deposit to purchase one immediately. It also applies to individuals who are uncertain whether they want to commit to a specific property before buying.
Can I terminate a Rent to Own Home agreement?
Yes, a tenant can typically terminate the contract during the option period. However, the tenant would lose any money paid that was intended to go toward the purchase of the home.
Related Entrepreneurship Terms
- Lease Agreement
- Option to Purchase
- Rent Credit
- Initial Option Fee
- Homeownership
Sources for More Information
- Investopedia: This is a great source for all financial and economic terms, and they can provide a detailed explanation of Rent to Own Home.
- Nolo: Nolo is another reliable source of legal information, providing detailed yet clear explanations of complex terms.
- Realtor.com: This site is dedicated to real estate and can provide practical guides, advice, and information about Rent to Own Home from a market perspective.
- Federal Trade Commission (Consumer Information): This is the official site for the Federal Trade Commission with consumer advice about Rent to Own Home and other financial options.
