The rent-to-own purchase contract allows someone with a desire to own a home to lock in a purchase price and build up rent credits that go toward the down payment on the future purchase. To fund the purchase at the end of the rental period the buyer obtains a regular mortgage. A mortgage company will require that the home appraise for the purchase price or higher.
To complete a rent-to-own contract, the renter buys the home at the end of the rental period at the price set in the contract. Almost always, the purchase requires a mortgage loan to pay most of the cost of the home. Mortgage lenders will not provide a loan for an amount more than the appraised value minus the lender's required down payment -- which may come from rent-to-own rent credits. If at the end of the rent-to-own contract the house will not appraise at the contract purchase price or higher, the buyer will not be able to finance and buy the home unless he is able to put up some cash as additional down payment.
Options in Contract
The rent-to-own contract may include some remedies if the home fails to appraise at a high enough value by the end of the contract. One option is to allow the term of the contract to be extended for a year or two to give more time for the home's appraisal value to increase. Another possibility would be that the price is automatically lowered to the appraisal value, so the purchase can be completed. Another possible option would be for the owner to return the initial deposit money, and even a portion of the rent credits, if the home is not worth enough for the buyer to get a mortgage. Check your rent-to-own contract to see if any of these or another clause discusses appraisal issues.
Renegotiate With Seller
If you are in a rent-to-own contract that does not provide any options for a low appraisal, you may be able to negotiate a change to the contract with the home's current owner. Ask the owner to either lower the price or extend the rental term to improve your chances of qualifying for the size of mortgage loan you need to complete the purchase. The willingness of the owner to negotiate depends on how badly she wants to sell the home.
Alternate Types of Financing
If you cannot obtain a regular mortgage on the rent-to-own home due to a low appraisal, consider other financing sources. The homeowner may be open to owner financing, especially if there is not a current mortgage on the home. You may be able to find a private lending source. A plus to a private lender is that you have shown the ability to make regular payments during the term of the rent-to-own contract. You probably do not want to walk away from the money you have earned in rent credits, so pursue alternative sources to find financing for the purchase.
- Bay House: Lease Options
- MSN Real Estate: Rent to Own: A Good Solution for a Troubled Housing Market
- nachi.org: Rent-t0-Own Home Leases
- The United States Department of Housing and Urban Development. "Example of a Residential Lease with Option to Purchase." Accessed April 15, 2020.
- Quicken Loans. “Rent-To-Own Homes: A Complete Guide.” Accessed April 15, 2020.
- The United States Department of Housing and Urban Development. "NSP Lease-Purchase Toolkit." Accessed April 15, 2020.
- Federal Trade Commission Consumer Information. "What You Need to Know About Rent-To-Own Home Deals." Accessed April 15, 2020.
- USA.gov. "Homeowners and Renters Insurance." Accessed April 15, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.