Rent To Own Program
Rent To Own Program
An arrangement must be made between you and your landlord or the rent-to-own business in order to participate in the program. In essence, the owner or rent-to-own business will lease a home to you in a manner similar to how a landlord would lease a home. The distinction is in how the rent funds are put to use. In addition to covering your rent, the rent payments will also save money for the eventual acquisition of the rental home. This is known as “rent credit.” Typically, rent-to-own contracts last one to five years, after which you can decide whether to use your rent credit toward the acquisition of the property. You will forfeit the entire rent credit if you do not buy the property by the conclusion of the lease.
Rent-to-own program types
There are technically only two kinds of contracts available: “option-to-purchase” and “lease-purchase.”
Option-to-Purchase – If the renter selects this option, they will sign a document stating that they have the choice but are under no obligation to purchase the home when their renting term is up.
Lease-Purchase – If they opt for a lease-purchase arrangement, they have committed to purchasing the home at the conclusion of the contract period. There may be a penalty if you don’t buy the house, regardless of the cause (loss of the mortgage or a simple change of heart).
Real-World Rent-to-Own Example
Let’s assume for the purposes of argument that the rent-to-own deal is for a period of three years. The tenant agrees to pay a monthly rent of $1,000 plus an extra $500 toward the down payment. This is how it will operate:
- $350,000 has been set as the home’s ultimate asking price.
- Deposit for the choice is $8,750 (2.5%)
- There will be $341,250 left on the mortgage at the conclusion of the rental period.
- The rate is $1,500 per month.
- The amount contributing each month to the down payment is: $500
- $500 times 12 (months) equals $6,000 (per year for down payment)
- 3 years at $6,000 equals $18,000.
- $341,250 – $18,000 = $323,150 (remaining on mortgage after 3 years)
How Does Rent-To-Own Work?
Each rent-to-own house has a unique rental contract or agreement that the tenant must abide by in order to continue living there and be eligible to buy the home. But usually speaking, when you sign a rent-to-own contract, you can anticipate the following.
Make Payments – Rent-to-own renters are expected to pay their landlord on time every month.
Build Rent Credit – As you pay your rent, you’ll accrue rent credit that you can use as a down payment or to boost your mortgage qualification.
Own a Home – You may file for a mortgage at the end of the lease (or at any time during the lease). If you’re eligible, you can buy the house and apply the rent rebates to the price.
With the help of the rent-to-own program, you can start making investments in house ownership right away. With the aid of this program, you’ll learn how to manage your money better, remain on track, and take the necessary actions to establish the equity and a credit history needed to be approved for a mortgage. The Rent-to-Own program will get you started on the road to homeownership quickly, and you’ll also profit from a better credit score and true equity in your home.
What Is The Rent Process?
Following confirmation of the arrangement, the tenant will make consistent payments over a number of years, typically on a monthly basis. (1-3 years is most common). The payments are split into two parts, with the rental fee receiving the larger component of each payment (roughly 75%) and the down payment and potential home equity receiving the smaller portion (roughly 25%).
If the tenant decides or is required to purchase the home after the lease expires, they will ideally have paid off enough of the down payment and improved their credit score to be eligible for a conventional CMHC (Canadian Mortgage and Housing Corporation) insured mortgage. If the tenant’s agreement to buy the property is optional, they are free to back out of the agreement if they don’t like the house or have another good reason not to when their leasing term is up.
The Option Deposit: What Is It?
The prospective tenant will typically be needed to pay what is known as a “option consideration” or “option money” in order to enter into a rent-to-own agreement. This non-refundable deposit, which typically equals between two and five percent of the home’s ultimate asking price, is negotiable.
A separate agreement known as the option consideration grants the tenant the right, but not the obligation, to purchase the home at the conclusion of the rental term. The landlord may still permit the renter to rent the property if they refuse to pay the option consideration, but they will not be granted the right to buy it at the end of their lease.
The amount of the option payment may be applied in full or in part toward the tenant’s eventual down payment on the house, but each contract is distinct.
Buying The House
If and when the new potential homeowner decides to purchase the house, the price will be determined by the terms of the rental agreement. Some lease agreements stipulate that the ultimate asking price for the property must be decided upon and fixed before the tenant can move in.
The asking price, however, is sometimes specified in rent-to-own agreements to only be established at the conclusion of the rental period and to be based on the home’s appraised market worth. Actually, due to the ever-changing nature of the real estate market, the majority of renters prefer to have the asking price guaranteed.
Benefits And Drawbacks Of Rent-to-Own
Consider the benefits and drawbacks for both the seller and the renter if you think you’d make a suitable candidate for the rent-to-own program. It’s crucial to be aware of them before you accept any contracts.
Benefits for Tenants or Potential Homeowners:
- Test Drive a Home Without Risk – The tenant has the right to end the rental agreement at the conclusion of the rental period if the contract is an option-to-purchase agreement. This enables them to use the home as a “test-run.” They are not required to purchase the home if they dislike the neighborhood, the clauses in the contract, or the home itself.
- Helps Build Credit – As you make your monthly payments, you’ll establish a solid payment history, which could have a beneficial impact on your credit.
- Helps Save For A Down Payment – The tenant’s contributions that are not for rent go toward the house’s down payment. Those who originally cannot afford the down payment can add to it gradually and have time to improve their financial situation.
- Lock-in Asking Price – If the asking price is locked in, even if the real estate market changes and the house’s value increases, the renter will still be required to pay that amount for the house at the end of their lease (exclusive of rent payments).
Disadvantages for the Tenant Or Future Homeowner
- Need To Qualify For A Mortgage To Buy – The tenant might not be able to get the financing they need to buy the house if their financial situation and credit score have not improved by the time their leasing agreement ends.
- Deposit may be lost – The tenant’s deposit will be forfeited if the agreement is an option-to-purchase and they have already given the option consideration but decide not to buy the property.
- In charge of maintenance – In some instances of rent to own, unlike an apartment, tenants are in charge of all necessary maintenance and repairs. Additionally, they might be required to pay for property taxes, homeowners’ organization dues, and insurance.
The renter might pay significantly more than the house is actually worth and might not get their investment back if they decide to resell it in the future because the asking price of the home is combined with the rental costs and all other homeowner-related expenses.
You may be evicted by your owner – Some landlords are also stricter than others. As a result, if you fall behind on your payments for an extended period of time (sometimes 90 days), they may attempt to evict you or pursue legal action.