A common option to purchasing a home is referred to as a rent-to-own (lease or lease-to-own) agreement. When a buyer signs this type of contract, they agree to pay rent for the property for a particular stretch of time before taking an option to buy it on or before the expiration of the lease.
A rent-to-own agreement can be the best option for people who are interested in owning a home but have not been qualified for a mortgage, or those who are yet incapable of meeting the demands of being a homeowner. Say you have a bad credit score, but this is only because of temporary issues that are now behind you, and you have been doing fairly and consistently rebuilding your credit ever since. Your debt-to-income ratio is perhaps too high (though not by much) and there’s sufficient space in your budget for making some extra payments, thus significantly lowering your debt in the next couple of years.
You might have a job with a pretty good salary, or landed one with a bigger pay than your old job, but it’s only been a few months and your lender isn’t convinced that you have a stable income source. In the same way, you may be successfully self-employed, but your track record is not comfortable enough to lenders. Or you may have saved some money but it’s still enough to cover the typical down payment for a home, which is usually around 20% of the purchase price.
If your situation resembles any of the above, then a rent-to-own agreement may just be your best bet. You can secure a properly you like now while working on your credit score, business or employment history, savings or anything else that will boost your chances of being approved for a mortgage. And, should the option money or a portion of the rent approach the purchase price, you can also begin to build some equity.
A rent-to-own agreement works when potential buyers are absolutely sure about being able to buy the house upon the lease term’s expiration. If you honestly think there’s more than a 50% chance that you will move out and not proceed with the sale, think twice. It’s highly improbable for an owner or landlord to agree to a refund of the rent credit and the option fee to give you that flexibility of moving.
If you see even the slimmest chance of you not qualifying for a mortgage or any other financing before the lease expires, you should probably just keep renting, fixing your credit, and saving up for a down payment. And when you’re fully prepared, you can pick any house on the market that aligns with your needs, aesthetics and budget.