The homebuying process requires first-time homebuyers to be well-prepared to take on the responsibility of owning a property. However, if you’re still on the fence about buying a house, then there’s another option you can consider — a rent-to-own agreement. Instead of buying right away, you can opt to rent the property for a given amount of time while still having exclusive purchasing rights. Many sellers and buyers have benefited from this type of agreement, but is this the right option for you?
To help you decide, we’ve explained what a rent-to-own agreement includes, as well as the main pros and cons to consider as a first-time homebuyer.
What Is Rent-to-Own?
A rent-to-own contract, also commonly referred to as a lease option agreement, occurs when a buyer is given the choice to rent the property for a specified period before buying it from the seller. It’s important to note that there are two types of this agreement: a lease option agreement and a lease-purchase agreement.
A lease option agreement offers the renter the option to buy the property from the owner once the lease ends, though they are not required to do so. If you find yourself not wanting to buy the property after renting it, you can simply move out without paying any additional fees to the seller.
On the other hand, a lease-purchase agreement will require the renter to buy the property from the seller once the lease ends. Choosing not to may result in a lawsuit or losing out on the money you’ve paid in rent that would have gone towards your down payment. A lease-purchase agreement should only be considered if the house offers what you’re looking for, a home inspection has been done, and you’re financially prepared to take on a mortgage once the lease ends.
Rent-to-Own: Pros and Cons Explained
The key to entering a rent-to-own agreement with confidence is to know exactly what you’re getting yourself into and understand this type of process. Here are the main pros and cons of rent-to-own agreements to be aware of.
The Pros of Rent-to-Own
- Allows you to prepare your finances: A rent-to-own agreement is a great way to buy additional time if you’re working to improve your credit score or save a larger down payment while renting. Plus, you can easily report your on-time rent payments to TransUnion through CreditBoost* to contribute to your FICO 9, FICO XD, and VantageScore credit score. All you have to do is invite your landlord to Avail to set up your account.
- Familiarize yourself with the neighborhood: Rent-to-own can be the perfect way to see what the neighborhood is like and if it’s a good fit for your lifestyle before committing to homeownership.
- Lock in the purchase price: The housing market is constantly changing, meaning the original asking price could substantially increase at any moment. But with a rent-to-own agreement, you can lock in the original purchase price when you sign the lease.
- Spend less time moving: Since you’ll already be settled into the property, then you’ll no longer have to worry about hiring a moving company or packing up your belongings.
- Work towards building equity: Although you’re not technically building equity while renting, the payments you make will be contributing to the down payment for the home. Once you become the homeowner of the property, this will then contribute to your home equity.
The Cons of Rent-to-Own
- Higher chance of losing money: If you decide not to buy the property after signing a lease-purchase agreement, then you may lose money. Not only have you already paid the non-refundable option fee, but the seller can also keep the money you’ve paid in rent that was going to be used for your down payment.
- Missed payments can void your agreement: Failing to pay rent can result in the whole agreement being voided by the seller.
- Requires a mortgage once the lease ends: While rent-to-own agreements allow you to prepare your finances to own a home, be aware that if you don’t have a mortgage approved by the time the lease ends, then this can void the original agreement and leave you without a home.
- Leaves the buyer responsible for the seller’s debt: The way you handle your finances matters, but the same applies to the seller. The original property owner could stop making payments on their mortgage or local property taxes, which would leave you responsible for any outstanding debt that’s on the home once you become the new owner.
Is It Worth It to Rent-to-Own?
The benefits of a rent-to-own agreement make saving for a larger down payment or improving your credit score much easier than opting to buy a property right away. Even though you can always buy a home with bad credit, it’s best to wait until you have a credit score of at least 629 and have a lower debt-to-income ratio to avoid overpaying on interest.
That being said, a rent-to-own agreement should only be considered if you’re confident you’ll want to stay in the home for several years and can have a lawyer review the contract. A trusted Realtor and home inspector can also help you navigate the process to ensure you’re aware of any potential problems that may arise during the leasing period.
What Is Better: Rent-to-Own or a Mortgage?
Rent-to-own agreements are ideal for homebuyers still working to get approved for a mortgage loan with a lower interest rate. If you already qualify for your desired type of mortgage loan, then a rent-to-own agreement won’t provide you with much benefits.
Start the Homebuying Process With Realtor.com®
Now that you’re aware of the main rent-to-own pros and cons, the next step is deciding whether or not this route to homebuying is the best for you. Whether you prefer to buy a home right away or prefer to rent it out for a few months, Realtor.com® can help you find trusted Realtors in your area and connect you with a mortgage lender you’ll feel comfortable working with.
For more educational content on the homebuying process, check out our first-time homebuyers resource page. Get expert insights, downloadable checklists, and more.
*CreditBoost results may vary by individual.
