Top 10 questions to ask when "Renting-to-Own" a home

"Rent to own" has become popular over recent years. Home prices have risen, and first-time buyers find it more challenging to get started on the property ladder.

But what exactly is rent to own, and what are the most often asked questions about it?

Well, rent to own is an alternative route to homeownership. Often for those who can't obtain financing due to poor credit or because they haven't saved enough money for a down payment, or both. The plan is that you rent a home for a certain period with the option of buying the property before the lease ends.

Rent is paid throughout the lease, and a payment percentage is applied to the purchase price. This may have been fixed at the outset of the lease.

And, the most common questions:

1) What monthly rent can I afford?

Unlike renting an apartment, where once the rental is paid to the landlord, it is not recoverable, renting to own is effectively an investment you are making in the home for the future. In other words, you are making a significant commitment to keep on with monthly payments even after the lease expires as you are buying the apartment. It's akin to having a mortgage;

2) How much is required at the start of the lease?

Usually, this will be the first month's rent, plus any security deposit the landlord requests, perhaps 2 or 3 months.

3) If I take the option to buy, how much down payment will be required?

One benefit of rent-to-own deposits is that they are generally smaller than a mortgage downpayment, mainly if some rent has been applied towards the purchase price. Typically, around 5 – 10% of the home price may be required.

4) Do I need to exercise the option to buy?

This depends on the agreement with the landlord. In most cases, it is 1 or 5 years. You will need to save money toward the purchase price during this time, so you have a better chance of getting approved for a loan. It's essential to determine this at the outset and have it written into the agreement.

5) How much of the rental payments is credited toward the purchase price?

This amount is negotiable with the homeowner, but generally, around 20% is considered fair.

6) Who is responsible will pay for repairs and maintenance during the lease period?

Technically, the majority of your monthly payment is still going toward rent, which makes the homeowner legally obligated to fix any maintenance issues in many states.

7) What if the property needs any repairs?

If the home needs repairs, the responsibility for fixing such items should be agreed upon at the outset. If the tenant has to fix them, perhaps the final purchase price can reflect this.

8) How can I verify the landlord is making their payments on their mortgage?

The contract can stipulate that you can contact the lender to make sure all payments are being made on time.

9) Will my credit rating improves during the rental payment period?

The rent-to-own agreement will state that you will need to purchase the home after a set number of years. To not lose out on the payments you've made toward the house, you need to do your best to ensure that you'll qualify for a loan on the remaining balance to purchase the property.

10) Can I extend the time I'm leasing if I don't qualify for financing to purchase the home?

In some instances, you may not be able to improve your credit rating enough to obtain a mortgage at the end of your lease period. In other cases, it's possible to get a 1-2 year extension that provides additional time for credit repair.