What is Rent-to-Own?
Rent-to-own is an agreement that you will enter into with either your landlord or a rent-to-own company. You will be renting a home from your landlord or your rent-to-own company, with a portion of your rent going towards an eventual down payment on the purchase of the home. This is known as a “rent credit”. You will have the right to purchase the property either during your lease or once your lease expires, however you are not forced to purchase. This can range from one year to five years. Should you choose not to purchase the home, you will lose the rent credit that you have built up.
A rent-to-own agreement bounds your landlord to selling the home to you. Your landlord cannot sell the home to anyone else during the option period of your agreement. The option period is the time during which you have the option to purchase the home.
How does Rent-to-Own work?
Renting to own a home involves two sets of contracts: a rental agreement and a rent-to-own agreement. Rent-to-own differs from regular rentals due to the addition of a rent-to-own agreement, which can be either a lease-option agreement or a lease-purchase agreement.
- Lease-Option Agreement: Also known as option to purchase agreements, you are given an option to purchase the home in the future, however, you are not obligated to purchase the home. This means that you can choose to walk away at the end of your lease without any additional penalties.
- Lease-Purchase Agreement: In a lease-purchase agreement, you agree to purchase the home at the end of your lease. Failure to purchase the home, such as if you are not able to qualify for a mortgage or if you have changed your mind, can result in penalties.
Whether you sign a lease-option or lease-purchase agreement, an agreed-upon portion of your monthly rent payments will be accumulated to be eventually applied towards the principal of the house. These are known as rent credits. You will lose the rent credits that you have paid if you do not purchase the home. Your agreement will also set out terms such as the purchase price of the home.
Why Choose Rent-to-Own?
Rent-to-own homes are a good choice for renters who know that they want to save up to purchase a home, and do not want their rent payments to go to waste. It might be because the renter isn’t able to afford the home at the moment, but after a few years they expect to have saved enough to afford a home. It might also be because they have a poor credit score or a low income, which will make it more likely that they will be declined for a mortgage.
Rent-to-own gives renters the opportunity to build up their savings, both directly through rent credits which will eventually be applied towards the home purchase, but also indirectly through more time. Making regular on-time rent payments will also help to increase renter’s credit scores and help them to have a required credit score to get a mortgage. This may increase the likelihood of approval for a mortgage, or access to more favourable mortgage rates.
Interested? Email us today for rent to own properties at info@approvedbyjames.ca
