How the Rent To Own Works
A “rent to own” arrangement is also known as a “rent with option”, “lease purchase”, and “lease option”. It is a combination of a lease agreement and a purchase option agreement. Most people know what a lease is. Under the purchase option portion of the lease purchase agreement, the “landlord/seller” gives the “tenant/buyer” an exclusive right to purchase the home at a pre-determined purchase price” during the lease term as long as the tenant/buyer abides by the terms of the lease. In exchange, the tenant/buyer gives the landlord/seller a non-refundable monetary amount, called an “option consideration”. This option consideration is usually given in lieu of a security deposit and is often credited towards the down payment when the tenant/buyer excersies their right to purchase the home. The amount of option consideration set by the landlord/seller is often on a sliding scale, typically between 1-10% of the purcahse price, based on the tenant/buyer’s qualifications.
- TENANT/BUYER WINS ~ Unlike a security deposit for a standard rental agreement or a down payment on a purchase contract, the option consideration is what is placed down when a tenant/buyer under a rent to own agreement.
- LANDLORD/SELLER WINS ~ The option consideration is non-refundable and typically more than a security deposit when compared to renting. It is typical to ask for between 1-10% of the purchase price as option consideration, depending on the applicant’s qualifications.
The main factors in determining the qualifications of a tenant/buyer are:
- Rent history (no evictions in past 5 years)
- Job history (2 months of documented income must be shown)
- Credit score (520 minimum, no pending bankruptcy)
- Amount of option consideration tenant/buyer has available to place down (more option consideration given can offset lack of qualifications in other area)
There are a few things that make the rent to own agreement different than a “standard purchase agreement” or a “standard rental agreement”. Below are some of the differences based on the landlord/seller using the rent to own agreement provided by theRTOplace.com:
- Security Deposit ~ Unlike a standard rental agreement, the rent to own agreement does not require a security deposit (or if required by state law, a minimal security deposit may be required). Why? The security deposit is replaced by a non-refundable option consideration. The option consideration gives the tenant/buyer the exclusive right to purchase the home during the rent to own term, as long as the tenant/buyer abides by the terms of the agreement. And, unlike a security deposit, the option consideration paid up front by the tenant/buyer is credited towards a down payment if the tenant/buyer wants to convert to traditional financing later.
- Maintenance ~ Unlike a standard rental agreement, the rent to own agreement requires the tenant/buyer to perform most maintenance on the home. This gives the tenant/buyer the opportunity to really experience some home responsibilities before actually committing to purchasing.
- Rent Credit ~ The rent to own agreement has the landlord/seller provide the tenant/buyer a “rent credit” during the term of the rent to own agreement. Rent credit is a predetermined amount of the monthly rent that goes to reducing the purchase price. It is given only if the tenan/tbuyer makes “on time” monthly payments and abides by all the terms of the rent to own agreement.
- TENANT/BUYER WINS ~The tenant/buyer accumulates rent credit to help reduce the purchase price.
- LANDLORD/SELLER WINS ~ In exchange for rent credit, the tenant/buyer agrees to do things such as pay on time, make minor repairs to the home, and take the home in “as-is condition”.
The tenant/buyer gets to move in once the option consideration and first month’s rent is paid and the rent to own agreement is signed. During the lease term, the tenant/buyer can work out any credit issues and/or save for a down payment required to obtain traditional financing prior to the end of the rent to own agreement.
The tenant/buyer makes rent payments to the landlord/seller during the term of the rent to own agreement. The landlord/seller is obligated to pay any underlying mortgage, condo/homeowner dues, tax, and insurance payments. The landlord/seller still gets any tax deductions for these items while making those payments.
- TENANT/BUYER WINS ~ The tenant/buyer has time to repair their credit and save any other money required to qualify for tranditional financing.
- LANDLORD/SELLER WINS ~ The landlord/seller should receive a steady payment from the tenant/buyer, which is valuable if the home is currently vacant or about to become vacant. Unlike a typical home purchase that may take 30 days or more to get bank financing, the home is occupied quickly and a monthly payment is received until the end of the rent to own term or the tenant/buyer qualifies for traditional bank financing, whichever comes first.
Once the tenant/buyer is able to obtain traditional financing to exercise their option to purchase, the tenant/buyer notifies the landlord/seller. Closing is arranged, title is transferred, and the tenant/buyer experiences all of the benefits of home ownership (tax deductions and appreciation). After closing, the tenant/buyer stops making rent to own payments and starts living and loving the American Dream of Homeownership! The landlord/seller has sold the house and avoided paying costly real estate commissions.
- TENANT/BUYER WINS ~ The tenant/buyer is able to live in a home they currently don’t qualify for under traditional financing guidelines and buy it later so they don’t have to move twice.
- LANDLORD/SELLER WINS ~ The landlord/seller has a consistent payment coming in until the tenant/buyer is able to qualify for traditional financing and gets to sell while avoiding real estate commissions..
TheRTOplace.com Process Getting YOU From Rent… to Own for Tenant/Buyers
Once you understand what a rent to own is, below are details on how to go from a Renting… to Owning through our rent to own program. You, too, can experience the American Dream of Homeownership!
Find a home you likeLook in our Available Homes section and find a home that you would like to see. Once you see a home you are intersted in, you will need to follow the link found in the details section of that home and fill out your contact information to see the home. An e-mail with your information will automatically be sent to the person who “listed” that home (we’ll call them the ‘owner’). They will contact you with instructions to see the home. Note: If you don’t see a home you like right now, you can click here to sign up to be notified of new homes BEFORE they are advertised to the public!
See the home & fill out an applicationOnce you have seen the home, the owner will have you will out an application to determine when you would qualify for “traditional financing”. Don’t worry if you don’t have the best answers for the application because the rent to own is st up for those who don’t qualify for “traditional financing”. Be honest in the application so the owner can best work with your situation.
Screening processObviously, every owner can’t accept every application they receive. Your application will be screened for rent, job, and credit history. This will involve running your credit. You’re credit will NOT need to be pulled if: 1. You have give a copy of your credit report with the application, or 2. You have a pre-approval letter from a lender qualifying you for the price of the house. Note: Again, the rent to own was made to work with those with “less than perfect credit”. You may be asked to offset your risk with more money down. Please note that the days of “sub-prime lending to folks with damaged credit AND no money down” are over… so please have some money available to offset your credit risk! 🙂
Complete the paperworkCongratulations!! You are the lucky one the owner has selected to rent to own the home. You will sign a rent to own agreement and place down your first month’s rent and any additional funds down, refered to as an “option consideration”, required to rent to own the home. The amount you place down will go towards the “principle balance” of the rent to own agreement and will usually get credited towards a down payment if you decide to “refinance” using traditional financing.
Move in and start making rent to own paymentsYou will pay your rent to own payments directly to the owner providing you with the rent to own opportunity. The owner pays the principle, interest, taxes, insurance and any HOA/condo dues (and continues to get the tax write off) until you are able to “refinance” into traditional financing later. You get the benefit of accumulating “rent credit” each month, a portion of your monthly payment that will also reduce the principle amount due under your rent to own term, for a set period of time during the rent to own term… allowing you to have “principle buy down” while you are still renting.
Contact a mortgage brokerAs soon as you move in, work with your mortgage broker (we can recommend one if you don’t have one) to develop a plan convert to traditional financing at the end of the rent to own term. If necessary, you may want to get into a credit repair program (we can recommend one if you don’t have one). During the lease term, periodically check in with your mortgage broker to ensure you are on track to purchase during the lease term.
Refinace out of the rent to own laterOnce you are able to, contact the owner to let them know you ready to refinance out of the rent to own. In addition, contact the closing company to make closing arrangements. At the closing, you will get credit for any “rent credit” you agreed upon with the landlord/seller, as well as for the “option consideration”.
Homeownership!!Once you’ve achieved the American Dream of Homeownership, you will stop paying the landlord/seller and start paying a mortgage payment to your mortgage company that provided your traditional financing. This will most likely be a different amount than the lease payment you made – usually, it is higher. But, you will now get all the benefits, like appreciation and tax write off, of owning a home. Get started now! Check the Available Homes section for a rent to own home that to meet your needs!! We look forward to getting you from Rent… to Own.
Rent to Own Frequently Asked Questions (FAQs) for Tenant/Buyers
Questions regarding the terms of the rent to own agreement are answered as if the landlord/seller were using the paperwork provided by theRTOplace.com. Landlord/seller may use a different agreement with different terms.
Answer: Consider the benefit of having the option, not obligation, to purchase during your lease term? You never know what your situation will be one or two years down the road. If you plan on purchasing at some point, you might as well start preparing now. Place down money that goes toward principle. Stop throwing away rent!! Start getting “rent credit” each month that goes towards principle.
Answer: All homes are available for immediate purchase. I imagine most landlord/sellers may even discount their sales price if you are able to purchase immediately… although that is ultimately determined by each home’s landlord/seller. Please register and see the contact info for the particular home you are interested in and negotiate with that person directly.
Answer: This is the money you are required to pay up front to the landlord/seller, instead of a security deposit (unless required law) or down payment (as required with purchase agreements). It is credited towards the principle balance of your rent to own agreement. Additionally, most mortgage brokers credit the option consideration as a down payment under “traditional financing”.
Answer: The only way to determine if you qualify is by contacting the landlord/seller of the home you are interested in. Qualification is not done by this website. Tenant/buyers, please do not call us to get pre-qualified or ask if you qualify for a particular home. If requested, we give landlord/sellers contact information of mortgage brokers in their area that specialize in working with rent to own agreements and/or first time home buyers.
Answer: No. You pay $1000/mo in rent. If you decide to purchase after one year, you would have $300/mo credited back to you at closing ($3,600 within the first year).
Answer: That will depend on what your credit looks like after the bankruptcy (which must be clean), how much money you have for an option consideration to offset your risk, and the landlord/seller’s motivation. A landlord/seller will make that determination once they qualify you. I recommend you see the home and talk to the landlord/seller. From our experience, if you can off set your risk with enough option consideration, you will be able to find a home to rent to own.
Answer: That will depend on your landlord/seller and the rent to own agreement you enter into. Some agreements have the rent credit fixed for 1, 2, or 3 years… some have no limit.
Answer: You can purchase the home at any time during the rent to own term. You do not have to wait until the end of the rent to own term to purchase. Owners may often set up incentives for you to convert to a purchase using traditional financing within the first or second year..
Answer: Typically “No”. You are required to pay the option consideration and first month’s rent prior to moving in. Some landlord/sellers may charge a security deposit on top of the option consideration, which is sometimes mandated by state law.
Answer: No. These items are nonrefundable and may only be used during the length of the agreement.
Answer: This is determined by the landlord/seller. They may pre-determine the time period up front or they may structure the term based on your individual qualifications. They are rarely shorter than one year or longer than five years.
Answer: The landlord/seller is not obligated to extend the agreement, although most will consider extending an agreement. Terms of the extension mya change (purchase price, rental amount, rent credit, etc.).
Answer: No. Both rent credit and option consideration is only credited toward the home you are currenting occupying… not other homes on the site.
Answer: During the rent to own term you do not have to pay these items. You will have to pay these items once you convert to a traditional purchase using traditional financing… but you won’t have to pay rent to own payments anymore!
Answer: The landlord/seller’s homeowners insurance does not include your personal belongings while you are occupying the home because, technically, you are a renter. I recommend you get “Renter’s Insurance” to cover your personal belongings during the lease term. Example: If a tree falls through the house, smashing your personal belongings, homeowner’s insurance will fix/replace the homeowner’s house and belongings, but it won’t fix/replace your belongings. We HIGHLY recommend renters insurane to all tenant buyers.
Answer: No, you can walk away from the agreement at the end of the rent to own term. But the option consideration is nonrefundable and you are still be obligated to the other terms of the agreement. Sometimes it better to do this when compared to selling a house if you purchase traditionally where you may have to pay real estate commissions or closing costs in order to sell the home.
Answer: The option consideration gives you certain rights under the rent to own agreement that a security deposit does not give you under a standard lease agreement. A security deposit, when given back to you at the time of purchase is often viewed by mortgage brokers as a ‘kickback’ prior to selling (not allowing it to go towards your down payment). When taken in the form of a nonrefundable option consideration, most mortgage brokers allow that money to be applied directly to your down payment when trying to obtain traditional financing.
Answer: Yes, you are responsible for mainainting the home and keeping it in good working order. Whether you perform it or hire someone to perform it. Think of it as the beginning stages of homeownership. If something large arrises, contact your seller/landlord and see what you can work out.