If you are like many Canadian property buyers, you need a mortgage to finance the purchase of a new home successfully. To qualify for a mortgage, you should have a good credit score and the required cash for a down payment. Unless you have these, the traditional approach to the acquisition of a home may not be an option. Fortunately, there is an alternative – rent-to-own homes.
What are rent-to-own homes?
A rent-to-own agreement allows you to rent a property for a specific period of time with the option of purchasing it before your lease expires. Traditionally, renting a home means that you will be making monthly rent payments with nothing to show for it the moment your lease expires or is over.
However, suppose you plan to own a home in the future but can’t afford the necessary mortgage payments today or don’t qualify for a mortgage (due to poor credit score). In that case, rent-to-own agreements allow you to rent a property with the option of buying it in the future.
A rent-to-own contract is simply an agreement that you enter into a special arrangement either with a rent-to-own company or your landlord. That means you’ll be renting a property from your rent-to-own company or landlord, with a portion of your monthly rental payments going towards the eventual mandatory down payment on the process of purchasing your house. This is commonly known as rent credit.
Keep in mind that you have the right to buy the rent-to-own property during the lease or the moment your lease expires. But no one will force you to buy it. Rent-to-own agreements usually bind your landlord or the rent-to-own company to selling the property to you. That means the company or your landlord cannot sell the property to anyone else during the option period of your rent-to-own agreement. The option period is simply the duration you have the option of purchasing the property you have rented.
How rent-to-own works
Rent-to-own projects usually involve two sets of contracts – a rent-to-own agreement and a rental agreement. The concept of rent-to-own homes differs from regular house renting because of the extra rent-to-own agreement, which can either be a lease-purchase agreement or lease option agreement.
In a lease-purchase contract, you’ll be required to agree to buy the property at the end or expiration of your lease. If you fail to purchase the property, whether because you’ve changed your mind or don’t qualify for a mortgage, you are likely to get penalized. In a lease-option agreement, you will be given the option to buy the property in the future but will not be obliged to purchase it. That means you can walk away at the end of your lease without any penalties.
Regardless of the rent-to-own agreement, you choose to sign, an agreed-upon percentage of your monthly rent payment will be accumulated to be applied towards the down payment or initial payment for the home. This percentage is known as the rent of credit. Remember, you will lose the rental credits you will have paid by the end of your lease if you choose not to buy the property.
The agreement will also set out other terms, such as the specific purchase price of your future home. You may want to consult with an experienced real estate agent to evaluate the advantages and cons of rent as well as the extra money you are likely to save if you lock in the property purchase price now.
Why choose rent-to-own homes?
Generally, rent-to-own homes are a perfect choice for Canadians who want to save up to buy a house and don’t want their monthly rent payments to just go to waste. A renter may also choose these homes because they are unable to afford a down payment for a house at the moment, but after a certain period of time, they expect to have saved enough cash to afford a home down payment.
Rent-to-own agreements usually create opportunities for renters to save through rent credit which eventually gets applied in the purchase of the rented home. Renters can also accumulate savings through other means to be able to afford a down payment if they already know the home’s purchase price.
Another reason to choose rent-to-own homes is if you have a poor credit history or low income, which makes it challenging for you to qualify for a mortgage. Note that making regular rent payments on time can help improve the renter’s credit history and score and probably help them address their credit issues and achieve the required credit score to secure a mortgage. This increases the likelihood of getting approved for a mortgage or accessing better mortgage rates when buying a home in the future.
It’s important to mention that rent-to-own deals have restrictions compared to buying a house outright. The rent-to-own property is still owned by the rent-to-own company or the landlord. That means you must adhere to all the rules and the terms set by the property owner. Violating the terms of your lease could mean that your right to purchase agreement will be null and void. You will also lose the option fee as well as your rent credit deposit.
How to find rent-to-own-homes
Although you can negotiate a rent-to-own agreement for a home that you are currently renting, it’s also possible to find rent-to-own homes that are listed for sale. A potential homeowner looking to sell their home may be open to a rent-to-own contract because it will allow them to continue earning rental income or even lock in a higher property selling price in a rent-to-own agreement.
Additionally, rent-to-own companies can allow you to choose a house on the housing market that you intend to rent with an option of buying it in the future. These companies are likely to limit you to a certain property price and down payment that you are currently eligible for. Next, you can choose a home listed on the market within the specified limits, the company will buy the property and then offer it to you on a rent-to-own basis.
Once you choose a local rent-to-own company, you may have the chance to buy a house in any neighborhood that the company allows. Also, the company may have its own catalog of listings which shows that these are their own investors’ properties. The benefit of choosing a home from the rent-to-own company’s catalog is that such properties often have lower down payment requirements.
Who pays for property maintenance for rent-to-own homes?
When renting, your landlord or the rent-to-own company will be responsible for the necessary property repairs and maintenance. But these responsibilities often vary depending on the terms of your contract. Although you may be responsible for snow removal or mowing your lawn, you might not be responsible for a damaged roof or other major repairs when you are renting.
In some cases, you may be responsible for all necessary repair expenses depending on the terms of your rent-to-own agreement. It’s important to mention that some rent-to-own companies often liken the rent-to-own arrangement to treating the property as your actual house. Since you will eventually buy the house, you might as well be paying for the house’s maintenance and upkeep.
However, you might be restricted from various actions such as painting the walls of a room or renovating the house. That means you need permission from the rent-to-own company to make alterations or significant changes to the house before you actually buy it.
In addition to property maintenance and repairs, you may be responsible for other regular costs of property ownership, such as utilities. Your landlord or the rent-to-own company will be responsible for the other costs of owning the home, such as property taxes, home insurance, and mortgage payments.
Final thoughts
Rent-to-own homes are a viable option for Canadians who want to own a house in the future but want to move in right away. This option gives them a chance to work towards improving their credit information and saving for enough financial resources for a down payment before applying for a mortgage.
