How Does Rent To Own Work: Beginner’s Guide - Mares Mortgage

How Does Rent To Own Work: Beginner’s Guide

how does rent to own work
Most people aspire to buy a home at some point in their lives. However, certain circumstances, like bad credit, can hinder any potential opportunities to purchase a house outright. But all hope isn’t lost. There is another option. You can buy a house that has a rent-to-own agreement. It’s a great way to test drive home without fully committing to it. If you’re interested, we’ll break down everything you need to know. Read on for more information.

What’s a Rent-to-Own Home?

A rent-to-own home, or lease-purchase, is a contract that allows for property sale over an extended period. They are pretty similar to leasing a car; you have the option to buy it or trade it in once your lease agreement is up. There are two types of rent-to-own contracts:
  • Lease option 
  • Lease purchase

Lease Option

Lease option contracts allow you to buy the property at the end of the agreement, but you’re not obligated to buy it. These contracts are more suited to buyers because if you’re uncertain about whether you want to buy a house, you can always change your mind once the lease is up.


Lease purchase agreements differ from lease options. At the end of a lease-purchase contract, you are obligated to buy the property.  However, this can be difficult if you’re having trouble getting the required financing. As a result, it could lead to litigation. That’s why it’s essential to figure out which rent-to-own contract you’re more comfortable with. Related: What Are Some Mortgage Modification Options?

How Does Rent-to-Own Work?

When renting to own a property, contract length will differ depending on the type that you choose. However, most contracts last anywhere from 1 - 3 years. There are three parts to these agreements:
  • Deposit fee
  • Purchase price
  • Rent premium

Deposit Fee

There will be a deposit fee you’ll need to pay to secure the house. It will usually be between 2 - 7% of the house’s purchase price, but it can sometimes be negotiated. If you choose a lease option contract and decide not to purchase the house at its end, you will forfeit the fee. However, if you agree to buy the house, the cost can be applied to the down payment.

Purchase Price

You need to agree upon the home’s purchase price with the seller before entering a rent-to-own contract. That way, you can eliminate unnecessary hassle when it comes time to complete the purchase. Prices will usually be set at or slightly above market value, so the owner can get some compensation for keeping the home off the market.

Rent Premium

Your rent premium isn’t like paying rent for an apartment. Instead, this monthly sum is the money that goes towards your down payment on the property Your payments will be held in an escrow account by the seller and will be available once you’re ready to buy the home. However, these funds are non-refundable, so make sure you’re aware of how much you’ll be paying each month. Do you want to sell your home but are unsure about what will happen to your mortgage? Don’t worry. Mares Mortgage has all the answers!

What Happens After Your Lease Contract Expires?

two men reviewing a contract Once your rent-to-own contract expires, you now have the option to buy the house or look for something else, depending on the agreement you chose. If you’re going to buy the home, start applying for a mortgage at least a month or two before the lease expires. If you don’t want to buy the house, you can purchase another, but you will lose all money put towards your current property.

What Are the Pros and Cons of a Rent-to-Own Home?

With everything we do in life, there are pros and cons. But since each person’s situation is different, a con for you could be a pro for someone else.  Here are some advantages and disadvantages of a rent-to-own property: Pros:
  • No need to save up for a down payment
  • The purchase price is locked in
  • Monthly payments go toward the overall down payment
  • You’re not obligated to buy the property (lease option agreement)
  • Remove buyers remorse
  • Upfront fees are non-refundable
  • You’re still liable for property taxes
  • You may have to buy the property (lease-purchase agreement)
  • Late payments come with hefty penalties
These are a few of the pros and cons of rent-to-own properties. However, do your due diligence before you decide on which route you prefer. Related: What Percentage of Income Should Go To My Mortgage

Is Rent-to-Own Worth It?

If you’re considering buying a house but don’t want to commit fully, then yes, rent-to-own is worth it. As we’ve already stated, depending on the contract that you choose, you’ll have the option to buy the house once the period is up. Even if you don’t end up buying the house afterward, you’ve still garnered enough experience to help you with future purchases. So whenever you’re ready to buy a home through the standard process, you’ll know what to expect. Related: How to Pay Off Your Mortgage in 5 Years

Land Your New Property With Help From Mares Mortgage

Whether you’re first-time homebuyers or are testing the market through rent-to-own properties, it’s vital to have someone in your corner throughout the process. That’s where we step in. Mares Mortgage has a team of trusted advisors that can get you your loan approval letter and close on your home in less than 30 days. Your new life is right around the corner. Why don’t you contact Mares Mortgage today to learn about our services? We’ll help you land your dream home today!
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