Will Rent-to-own Homes Work For You?

How rent-to-own homes work

For cash strapped and credit challenged American families, the growing market in rent-to-own homes is something of a mixed blessing. The phrase "rent-to-own homes" seems to suggest a simple process of paying rent until a house is yours, but it's much more complicated than that. In essence, rent-to-own, aka lease to own with option to purchase, is you taking a gamble on your ability to clean up your credit in time to qualify for home financing before your contract expires.

How rent-to-own homes work

If you have the financing and credit history to buy a home right now, rent-to-own or lease to own is not a smart choice. But if you lack the cash for a full down payment and need a year or two to get your credit history cleaned up before securing a mortgage, you're just the sort of person rent-to-own homes were designed for.

Here's how a lease to own house purchase works: You, the optionee, lease a home for a period of one to three years from a seller or optioner. At the end of that lease, you will have the option to purchase the house at a predetermined price written into the contract. Instead of a down payment, the renter pays an option fee. Option fees are smaller than down payments, and usually between 1% and 5% of the home's purchasing price.

The other part of the rent-to-own home contract involves your monthly rent. In order to build equity in the home, secure your financial position, and insure a monetary benefit to the seller, most lease to own housing contracts charge a monthly rent higher than market value. A down payment is accumulated by the combination of the option fee and a monthly premium, e.g. an extra $500/month in addition to a $1,500/month rent, plus your $4,000 option.

Here's the gamble: If you do not or cannot exercise the purchase option in your rent-to-own home contract, you lose both the option fee and the monthly premiums. But if you are able to clean up your credit and secure financing, you will have accumulated equity and locked in a fixed sales price on a home.

So are rent-to-own homes for you? That's probably something you should determine with a financial advisor. Current housing market trends, the strength of your credit history, and the length and terms of a rent-to-own housing contract should all be factored into your decision. Rent-to-own homes are a big risk, but your chances of success will be greatly improved by doing your homework and soliciting professional consultation.

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