How Does Rent To Own Work?


There are many ways to own a home, and one of the most popular among people with bad credit is the rent-to-own option. With this option, a potential homeowner can rent their home until they are ready to purchase. It sounds like an ideal solution, but it is important to understand how the process works before you get involved in one.

How Does It Work?

With rent-to-own, the potential homeowners find a funding company that will buy the property the homeowners want to buy and then rent the property to the homeowners. After a certain amount of time, usually dictated by the rent-to-own agreement, the homeowners pay a buyout price and the home is theirs.

Applying Rent

Rent-to-own arrangements can differ from finance company to finance company. In some cases, the rent you pay gets applied towards the buyout price and that makes your buyout price lower when you want to purchase the home. In some cases, the rent is not applied to the buyout price, but you can walk away from the agreement when it is over without losing anything if you choose not to buy.

The Buyout Prices Are Set

Most funding companies use rent-to-own agreements that have a buyout schedule that is set in stone. Most of the time, the buyout price is higher than the market value at the time the agreement is signed. Since the buyout prices do not change, the homeowner could get a great deal when it is time to purchase. They could also lose a lot of money. Most rent-to-own agreements are five years with the buyout price increasing each year.

Funding Is Not Guaranteed

The funding company that agrees to give you a rent-to-own deal is not guaranteeing that they will offer you buyout funding when the time comes. Every homeowner should assume that they will have to get their own buyout funding, and they have to remember that it could be years before they sign up for a mortgage. That means that they should try to repair their credit and increase their credit score as much as possibly while they are renting the property.

Who Does Rent-To-Own?

Rent-to-own arrangements are normally used by people with bad credit who want a home now and want the chance to repair their credit and buy that home in the future. Some funding companies require a lot of money down that is not refundable or applied to the buyout amount, and others do not. Potential homeowners should ask a lot of questions when they are talking to a funding company about a rent-to-own agreement.

In most of the cases, a homeowner will pay more for their home if they use rent-to-own. But the chance to buy a home now and possibly fall into a great deal a few years down the road makes a rent-to-own agreement appealing to many potential home buyers.