Rent-to-Own Programs and Advice
- Author: Aaron McCullough
- Posted: 2023-02-27
Many potential homebuyers are prevented from purchasing a house because of the challenge of saving for a down payment and the high costs of mortgages. Credit scores and histories can also be problematic for those trying to buy a home.
Another option for buying a house is renting-to-own. Several programs are out there that can make the transition to owning a home possible. These programs have advantages and disadvantages.
What is Renting-to-Own?
Renting-to-own means that a renter has the option to buy the home they live in from the landlord after a certain amount of time has elapsed. This arrangement requires a lease or rent-to-own agreement and usually an upfront fee to secure this option.
In the contract, the purchase price of the home is set, and rent payments include a “rent premium” that is placed in an escrow account to be used for a future down payment. Renters will pay a higher rent, but part of it goes toward buying the house.
In lease-option contracts, the renter then has the option to buy the home after the designated amount of time has elapsed. In lease-purchase contracts, renters are obligated to buy the house at the end of the period.
These two types of rent-to-own agreements can be solid options if potential homeowners are not financially ready to make a down payment or need to improve their credit scores.
The Home Partners of America is a leading rent-to-own program. To meet the application criteria, potential buyers usually need to have a 50% debt-to-income ratio, meaning monthly debts are not higher than half of an applicant’s income.
Home Partners then specifies the maximum monthly rent that potential buyers are allowed. These future buyers next work with a licensed real estate agent to locate a home. Home Partners then buys the home at the negotiated price.
Renters usually sign a one-year lease with five years of monthly rent secured. At the end of the first year, Rent-to-owners can choose to buy the home, leave the property, or renew the lease for up to five years.
With Home Partners, the rental and right-to-purchase price increases each year. This arrangement does not allot money for saving for the house but allows renters the first right to buy it. The program does have home buyers pay the appraisal amount of the home and closing costs.
The Divvy program is another top option for renting-to-own. This program is targeted at single-family homes that are move-in-ready and does not include properties that need extensive repairs or condos.
This program sets minimum and maximum home prices according to metropolitan areas that range from $60,000 to $550,000. Divvy requires a FICO credit score of 550 and establishes a budget for rent-to-owners.
Potential buyers with Divvy work with real estate agents to select a home that meets the designated budget. Like Home Partners, Divvy purchases the selected home in cash. The rent-to-owner places about 1% to 2% of the purchase price into an initial home savings account. This amount is the option fee required for the right to buy.
Divvy establishes three-year leases with its customers. Around 25% of the monthly payment goes into the home savings account until 3% to 10% of the purchase price is accrued. This amount can then be used for a down payment.
These are two examples of available rent-to-own programs. These and other programs both have pros and cons to them.
Rent-to-Own Program Pros and Cons
A major advantage of rent-to-own programs is the option of buying a home instead of continuing to rent indefinitely. Renting-to-own allows would-be home buyers to accrue a down payment over time and not have to pay all at once. Renters also do not have to qualify for a mortgage right away but can use the time to get better situated for one.
The disadvantages of rent-to-own programs include an up-front fee to secure the buying option, the locked-in purchase price of the home may be more than the house is worth when it is time to buy, and it can take many years to save the amount needed for the initial payment on the property.
To learn more about rent-to-own programs and get further advice, visit YourHousingSupport. Renting to own has its benefits and its downsides.