Rent to Own Versus Financing

Do you know the difference between rent to own and financing? Let's look at how they differ!

From just the name, you might think that renting to own is the best option around. Many people believe this without really understanding what the process looks like. However, there are some complexities about the rent to own process that you’d benefit from learning about as a homebuyer. You may learn that you would be better off going the route of financing your home.

Rent to Own

• Renter makes payments to seller to possibly reduce final cost of home1
• Based only on a possibility for buyer to purchase home in the future1
• This option works mostly as a waiting period for renters to decide if they want to be buyers, allow time to improve credit, or pay towards the final cost.1
• First premium payment is non-refundable (like a down payment) if renter decides not to purchase – this is not refunded.
• You should discuss which party – you are your landlord – is in charge of maintenance
• The ultimate purchase price may be unsettled as prices in the area can fall or rise over time, but the seller may be willing to lock in the future purchase price.
• You may want to consult legal counsel to draft or review a rental agreement so that you know what you’re getting into and you have all your bases covered.

Financing

• With the help of a lender, a buyer can purchase a home through financing. This means you pay on a loan for a duration of time at a certain interest (this could be fixed or adjustable).
• This is a loan with the full intent to own. The only way you wouldn’t end up keeping the home is if you miss payments repeatedly or default on the loan.
• Good for most common buyers who don’t have the amount of cash available to purchase a home outright. Allows a payment system (mortgage) for a buyer to pay towards.
• Credit and income are very important to qualifying for a mortgage.
• With financing, you inherit all the responsibility of the home because you become the owner. You may also have to pay for home maintenance and repair, taxes, insurance, and private mortgage insurance (“PMI”) if your down payment is below 20 percent.

Both options have pros and cons and some complexities that will arise with whatever your specific home situation is. The best thing to do is to gain a full understanding of each option as well as to decide whether you want to own your home outright, or else work towards owning your home through a rent to own option, knowing that ownership may be less certain if you go that route.

Be Financially Prepared For Either!

1. The Balance. 11 June 2018. Pros and Cons of Rent to Own: A Guide for Buyers and Sellers.  https://www.thebalance.com/what-is-rent-to-own-315664