Dreaming about owning your own property? A rent-to-own could be an option capable of during that dream into a reality. To own a property, you will need financing, and most lenders will also look at your credit score to determine if you qualify for a loan.

The good news is that you can rent-to-own without many challenges. But before you begin the process, it is important to know how it works and the advantages and disadvantages. We’ve prepared a comprehensive guide to help you make informed decisions when considering a rent-to-own.

What Is Rent-to-Own?

Rent-to-own is a lease agreement that allows an individual to buy a property from the seller after years of renting. While the agreement terms differ, you typically end up with a portion of the rent you’ve paid applied to the cost of the home or towards the down payment at the time of purchase.

Types of Rent-To-Own Contracts

There are two types of rent-to-own agreements, and the contract terms may differ. The contracts outline the arrangement between the parties involved in leasing the property and contain information such as due dates, monthly rent, and escrow. Here are the types of rent-to-own contracts.

Lease-Option Agreement

A lease-option agreement is a property contract that requires the buyer to pay the seller an option fee when you sign it. It comes with the option of buying the property for a predetermined price in the future, but does not obligate the renter to do so.

The rent payments you make over the leasing period go toward the down payment on the property once you are ready to buy it. Once your lease expires, you can discuss it with the seller and settle for a fair purchase price. The procedure involves an appraisal, which determines the current value of the property.

Lease-Purchase Agreement

A lease-purchase agreement is a contract between a tenant and landlord where the renter puts a certain percentage of their rent towards a down payment for purchasing the home later. The renter and the owner agree on the purchase price, which gives the renter exclusive rights to purchase the property.

The buyer has an obligation to buy the property at the end of the lease once they enter into a lease-purchase agreement. The two parties can agree on the specific date for an appraisal and the price.

The Pros of Rent-To-Own

Here are some of the pros of a rent-to-own property.

You Can Buy the Home or Move

Once your lease expires, you can decide to buy the property or move out. If you decide to purchase the property, you will get a mortgage from a qualified lender and follow the process of buying a home. All the monies you accrued in the downpayment will go to the lender.

More Time to Prepare Your Finances

When you rent-to-own, you can build your credit score to attract a better mortgage rate when ready to buy a home. It also allows you to save a larger down payment while renting and own the home at the end of your lease without worrying about where to get money to finance the property.

Can Save You A lot of Money on Repairs

Moving to a new home comes with many challenges, especially with repair costs. But this may be different with a rent-to-own property because the agreements split home repair costs and responsibilities between the landlord and the tenant. The tenant can cover small repairs, and the landlord covers large repairs, saving you along of money in the long run.

The Cons of Rent-to-Own

Here are some of the potential cons of the rent-to-own option.

Higher Chances of Losing Money

If you decide not to buy the home after signing a lease-purchase agreement, you forgo any money you paid as rent to the landlord. This may also include losing the option fee as per your agreement.

Missed Payments Can Affect Your Agreement

Signing the lease agreement means you agree to the terms and conditions, including paying rent faithfully. If you fail to pay the rent, the landlord might render the agreement null and void.

The Bottom Line

So is worth rent-to-own worth it? Deciding whether to go for a rent-to-own property solely depends on your needs and preferences. Using the above information can help you make informed decisions about whether you should rent-to-own. However, a rent-to-own is generally a good option since it builds your credit score and enables you to save for a larger down payment.