Renting to own, also known as a lease option, is another choice in today’s real estate market. Traditionally, if you were looking to purchase a home, you would save 20 percent of a home’s cost for a down payment and get a mortgage up front from a financial institution.
That option may be challenging if you have a bruised credit history, or you don’t have an adequate down payment, if you are new immigrants with little or no credit history or are self-employed.
Renting to own means you can save for a down payment while actually living in the house you want to buy. Usually, a portion of the monthly rent is set aside toward the down payment and there is often a significant deposit as well. At the end of two to four years, the down payment is collected and the renters apply for a mortgage.
Although it sounds like a win-win, there are pitfalls to watch for. Your monthly rental costs, due to the down payment portion, will usually be substantially higher than a regular rental. If you’re a renter in this kind of arrangement and you must break the agreement, you risk losing your deposit and the monthly savings in order to walk away. That could mean the loss of tens of thousands of dollars. If you still don’t qualify for a mortgage at the end of the rental period, you may have to walk away from the home and from your money too. If you’re late on a monthly payment, you can lso be evicted and forfeit your cash.
As with any contract that involves large amounts of money, make sure you obtain legal counsel before you sign on the dotted line. Make sure your investment is protected and that there is a clause for breaking the rental agreement that won’t break you!