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Rent-to-Own a Home? What You Need to Know First

November 25th, 2016 · No Comments · Mortgages

by Kristy Welsh

(Last Updated On: August 23, 2017)

Rent-to-Own a Home? What You Need to Know FirstIf you’re going to be paying rent anyway, why not enter into a rent-to-own situation? Well, a few risky reasons could surprise you. Get the facts on how rent-to-own works and how it can go wrong.

How It Works

As reported by Bankrate, the gist of rent-to-own looks like this:

  • You sign a rent-to-own contract with the owner of the home.
  • The contract includes an agreed-upon price you will pay for the home once the contract is up.
  • The contract usually lasts 2 to 5 years.
  • During this time, a portion of your rent gets set aside by the owner as a means of building up a deposit.
  • The portion set aside is usually an amount above and beyond whatever the standard market rate is for rentals in the area. For instance, if the standard rate is $1,500 a month and you agree to pay $2,000, then that means you have $500 going toward your deposit every month.
  • You can change your mind and opt not to buy when the contract is up, but you should expect to lose all of the deposit money you’ve been paying every month.

Why Rent-To-Own Is Risky Business

Whether they’re going out of their way to scam you or not, there are a number of ways a rent-to-own situation could turn ugly.

As reported by the FTC, you could make timely payments every month for years only to discover one or more of the following once the contract is up:

  • The person trying to sell you the home doesn’t even own it
  • Even if they do own it, they’ve been failing to pay the property taxes
  • There’s more wrong with the house than you realized
  • The owner refuses to make promised repairs
  • The house is being foreclosed on

Then there are the things that could go wrong on your end to prevent the deal from going through, like missing a payment or not qualifying for a home loan once it comes time to buy.

Try for Conventional Homebuying Instead

Considering the risk involved, before you sign a rent-to-own contract, look into the traditional homebuying process instead. We have a comprehensive collection of articles on mortgages, including a homebuyer’s dictionary, underwriting guidelines, a mortgage calculator, and the smart way to buy a home with bad credit.


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