Rent-To-Own Is Becoming A Popular Path To Home Ownership

Over the past decade, new mortgage loan regulations have made it increasingly hard for potential buyers to qualify for home loans. While Congress has attempted to counter with government-backed loans with looser regulations, the market has also produced a growing alternative for those who wish to buy a home but can’t qualify for a conventional loan.

Rent-to-own has existed for decades, but was a little-used purchasing instrument. Over the past ten years, however, this flexible home purchase option has continued to grow in popularity. Essentially, a prospective buyer and seller agree to terms that include one to three years of tenancy, during which time monthly rent is paid, then an option to purchase the home at the end of the agreed upon lease period. The tenant builds equity in the home because a portion of the monthly rent – called the “rent credit” – goes toward the principle value of the home leading up to purchase.

Rent-to-own can be beneficial for prospective buyers in several ways. First, those whose credit scores make it difficult to qualify for a mortgage have the opportunity to live in their desired home for a number of years and work to improve their credit before actually signing a purchase agreement. Second, it’s a great option for prospective buyers who may be anxious about the responsibility of owning a home. Rent-to-own allows for a test-drive of the property, the location, home maintenance and more.

Although rent-to-own terms can vary, tenants are not locked in to purchasing the home at the end of the lease period. Rather, the tenant has the option to move forward with the purchase before the home goes on the market to any other prospective buyers. However, should the tenant choose not to buy, they forfeit their monthly rent credits to the owner.

For prospective buyers interested in this flexible home purchase option, it may be helpful to speak with a real estate professional to locate a desirable property and fully understand the terms of a rent-to-own agreement.

Image via Flickr/lotinamarcus