What Are the Qualifications for Rent to Own Housing?

by Steve Lander
Renting to own lets you move in without a mortgage.

Moving into a house on a rent-to-own basis can get you closer to home ownership even if you aren't yet ready to actually purchase a home and qualify for a mortgage. Typically, getting into a rent-to-own property doesn't require a lengthy process or a complicated application. What it requires is the money to pay the rent and to make the extra up-front and monthly payments for your option to eventually buy the home. While rent-to-own structures can vary depending on what you and the owner negotiate, many of them involve paying an up-front option fee, monthly rent and an additional monthly allowance that goes toward your eventual purchase. As such, the key qualification requirement is to afford the cost of the rental and fees.

Option Fee

Most rent-to-own agreements start out with the payment of an option fee. Typically, the owner of the property will require you to pay some up front money to take possession of the house. Unlike a security deposit that gets returned to you, though, the owner keeps the option fee if you don't eventually buy the house. While option fees vary, they frequently fall between 1 percent to 5 percent of the property's purchase price. If you eventually buy the house, they will be applied to its cost. If you rent-to-own a house whose purchase price is set at $140,000 and you pay a 3 percent option fee, its purchase price will be reduced to $135,800 ($140,000 less the $4,200 fee) when you exercise your option.

Monthly Rent

As a tenant in the property, a large part of your monthly check to your landlord will cover your market rent. While you and the owner are free to negotiate whatever rent you want, most rent-to-own arrangements are based on the payment of rent that is in-line with what it would cost you to lease the house without a rent-to-own arrangement. The fair market rent can be set by reviewing what other comparable houses in the area charge for rent.

Rent Premium

In addition to paying a market rent, your monthly check will usually include an additional premium. This amount also gets applied to the property's purchase price. If, for instance, the market rent for a home is $995 and you pay $1,250 per month, that extra $255 per month would go to your purchase price. As with your option fee, though, if you don't eventually buy the house, the owner will usually get to keep your premium.

Long-Term Qualifications

The real qualification process comes about in the future when you have to buy the house out of the rent-to-own arrangement. Typically, you must apply for a mortgage and make a down payment to be able to exercise your lease option and buy the home. At that point, you'll need to have adequately strong credit to meet a lender's standards and stable income. Down payments are necessary because lenders usually don't consider your option fee and rent premiums to be a down payment -- they're just applied to reduce the purchase price. If you don't have those qualifications, you won't be able to exercise your option and you won't be able to buy the house.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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