Rent-to-own seems like the perfect opportunity to become a homeowner, at least on the outside. Pay monthly rent to the landlord as you normally would. Only, a little extra money is added to the rental rate, which can be applied toward the down payment if you decide to purchase the home. While RTO offers significant advantages, some disadvantages exist that you cannot ignore. We hope for the best in any situation, but without knowing both the pros and cons, you may get the exact opposite when it is time to buy the house. Read on to discover the ins and outs of this contract.
Related: Learn more about How Rent to Own works
Weighing the Pros and Cons of Rent to Own
- Save money
- Improve credit score
- No obligation to purchase
- Spend more money each month
- Home depreciates
- May not qualify for a mortgage
The biggest advantage of a rent-to-own home is that you are not obligated to buy. However, you then lose a lot of money and time.
For anyone struggling with credit problems, RTO provides an opportunity to rebuild your rating while you still have a place to call home. You must obtain a mortgage to buy the home and this requires good credit. Rent-to-own helps give buyers time to re-establish themselves and their credit.
Rent-to-own shoppers enjoy greater flexibility than what typical home buyers receive. You also save money because you lock in today’s housing prices just in case the home prices take a dramatic increase in the next few years. You also have the opportunity to save up more money to apply for rent-to-own the down payment.
Another benefit of buying with a lease option is the chance to improve your credit. To qualify for a mortgage, you need a minimum credit score along with a down payment equal to about 20% of the house price. When you rent-to-own, there are up to three years to save money as well as to improve your credit.
However, there is no guarantee of becoming a homeowner when it is all said and done. Without reading the terms carefully you may find yourself out of a lot of money and time. Read over the entire contract, ensure you can repair your credit, and that you have time to save up enough money. There are disadvantages of rent-to-own that shouldn’t be ignored.
Rent to Own Cons
Many things can go wrong during a rent-to-own deal because things are uncertain in this deal. If you have poor credit, do not have a large down payment, or other factors limit your ability to buy a home using traditional strategies, you may find rent-to-own somewhat challenging as well.
Several things can go wrong with renting to own since there is a lot of uncertainty that comes with this type of leasing. The majority of rent-to-own tenants end up not owning the home at the end of the lease period because of something that went wrong during the lease term. We’ll discuss these cons and let you decide if these risks are worth taking to eventually own a home.
If you do not save enough money or if you do not qualify for a mortgage for the eventual purchase, you are out the money that you have paid in rent, including the extra. Opt against buying the home and the same factors are part of the plan.
Related: Learn more about Common Rent to Own Scams
Home May Lose Value
Another disadvantage that rent-to-own buyers face is the possibility that the home will depreciate over time. The housing market fluctuates for this reason, but you are locked into the rental payments with the option to buy. You agree to a purchase price at the initial contract signing of the rental period and pay this amount to buy no matter the condition of the home at that time.
Read the contract of the RTO home lease carefully. Many contracts stipulate that missing one payment or even paying late can result in an eviction with no questions asked. In the case of a scrupulous landlord, this is a big risk that you take. Buyers and sellers must both be honest to make this process work or you will need a real estate attorney and a ton of aspirin.
Rent-to-own offers buyers a good opportunity to become homeowners without the stressors related to the traditional buying process. However, there are disadvantages as well as advantages of the deal. Learn more about both sides of the deal before getting into anything that you may regret later. Buying a home is a big investment and when you’ve taken the right steps, rent-to-own can be a great choice to help you live the American dream.