How Does Rent-to-Own Work?
8 October, 2011 / by cmi
We touched briefly on rent-to-own homes a couple of months ago when we explained how to recognize the scams from the legitimate offers on the market. And now that you know what you’re looking for, just how exactly do rent-to-own homes work?
Combining the matters of rent and a mortgage might sound like something that’s pretty complicated; but it’s not,really. Yes, when you enter into a rent-to-own mortgage, you will have to take on parts of a mortgage, and parts of a rental agreement. But it’s all broken down pretty simply and all you have to do is understand which parts are which, and why you’re paying them.
The first portion that you’ll be asked to pay is part of the mortgage – and that’s the down payment. While many rent-to-own agreements waive this requirement for bigger monthly payments, or a larger purchase price at the end of the rental agreement, most homeowners want you to pay a down payment on the property to act as a down payment. This protects them, in case you back out of the agreement, and it also shows good faith – that you’re going to still be in the property when it comes time buy.
The second portion that you’ll be asked to pay is part of the rental agreement – and that’s your rent! Unfortunately, renting to own does take a little longer than just buying outright, and you will still need to pay rent for a little bit longer. Your rent will still be paid every month, but how much you’ll be paying is where some rent-to-own homes differ.
Many rent-to-own homes will combine both the mortgage payment as well as the rent payment, although the mortgage payment portion is generally considerably less than the rental portion. Some homeowners will combine these two, so that you only pay one monthly payment. If this is the case, you need to make sure that your mortgage and rent payments are clearly defined and that you know how much of that payment is going towards each.
On the other hand, many homeowners also choose to divide up the two payments – with one clear mortgage payment, and a separate, just as clear, rent payment. While making two payments during the whole time you’re still officially a “renter” might be inconvenient, doing it this way can also make it much easier when it comes time to sign that Offer of Purchase – which you’ll need to do once your rental period is over and that coveted ownership period takes over.
Whichever way you do it or however the payments are set up for your rent-to-own property, you still need to make sure you’re working with a mortgage broker. Brokers can be an invaluable resource when it comes time to deal with the Offer to Purchase and set up the mortgage on your home. While it won’t be a traditional mortgage, you’ll still need an expert who can guide you through the ins and outs of the very special property you just claimed as your own!