You’ve probably heard of rent-to-own, also known as RTO. It’s a unique type of contract that helps people who might not otherwise qualify for a traditional mortgage get into a home. So, how does it work, and what do you need to qualify? Keep reading to find out!
WHAT DO YOU UNDERSTAND BY RENT-TO-OWN?
Rent-to-own is a type of agreement in which you agree to rent a property for a certain period of time, with the option to purchase it at the end of the lease. This type of arrangement can be beneficial if you’re not able to get a traditional mortgage. It can also be a good way to build up your credit so that you’re more likely to qualify for a loan in the future.
The downside of rent-to-own agreements is that they can be more expensive than traditional leases, and there’s always the possibility that the property will be sold before you have the opportunity to purchase it. However, if you’re careful and do your research, rent-to-own can be a great way to get your foot in the door of homeownership.
HOW DOES RENT-TO-OWN WORK?
With a traditional home purchase, the buyer secures financing through a bank or mortgage lender. The buyer then uses that money to pay the seller in full for the property. With rent-to-own, things are a bit different. The buyer and seller negotiate a purchase price and the buyer pays the seller a percentage of that price upfront—usually around 3.5%.
The buyer then rents the property from the seller for an agreed-upon amount each month. A portion of that rental payment goes towards the down payment on the property. At the end of the lease term—usually two to three years—the buyer has the option to purchase the property outright or walk away. If they decide to purchase it, they use any money they’ve saved up plus any additional financing they can secure to pay the seller in full.
WHAT DO YOU NEED TO QUALIFY?
To qualify for rent-to-own, you will need:
• A STEADY INCOME
You’ll need to prove that you have a steady income that is sufficient to cover your monthly rental payments, as well as any extra money you’ll be putting towards your down payment each month.
• A GOOD CREDIT SCORE
Most landlords will run a credit check before entering into an RTO agreement. A good credit score—usually 600 or higher—will give them confidence that you’ll be able to make your monthly payments on time and as agreed.
• A CLEAR RENT HISTORY
: Just like with your credit score, landlords will also want to see that you have a good rental history. This means no (or very few) late payments and no damages beyond normal wear and tear.
SUMMARY
Rent-to-own can be a great way for people with less-than-perfect credit or insufficient savings for a down payment to get into a home of their own. If you think RTO might be right for you, start by reviewing your finances and making sure you meet the basic qualifications listed above. From there, start searching for properties that fit your budget and needs!
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