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Home» Alberta Lending » What is a `Rent to Own`?

What is a `Rent to Own`?

Posted by Dave Fitzpatrick - March 7, 2019 - Alberta Lending

A Rent to Own (aka Lease to Own) home purchase is a lease combined with an exclusive option to purchase the property within a specified period of time. This is a potential solution for tenants who would not currently qualify for a typical mortgage. Buyers love this because it gives them time to save up for a larger down payment, time to clean up past credit problems, time to sell another home, and also time to try out the neighborhood before buying.

The purchase price is guaranteed at the beginning of the lease term. The payment arrangement acts as an automatic savings plan towards your future purchase, while you repair or establish your credit rating. Tenants are also typically required to put down a deposit of about 5 per cent of the final sale price – which will be held by the homeowner and applied to the price of the home at the end of the lease option.

Related Article – Steps required for Purchasing a Home

The lease is typically based on a 1 to 3 year term. Most Canadians are able to obtain their own financing after one or two years. The lease term works as a time benefit for you – giving you time to establish or restore credit and save up a larger down payment. You can exercise your Option to Purchase the property at any time during your lease term.

Your down payment is credited back to you when you purchase at the end of the term. Within a major city that has strong re-sale demand, you should budget for at least 3½-5% of the purchase price  however the more you are able to give as a down-payment, the lower your mortgage payments will be.

Rent-to-own home ownership can be risky for those who don’t understand exactly what they are signing up for. More often than not, a lease option agreement benefits the homeowner, not the purchaser. One reason is that the homeowner is taking very little risk and has a fair degree of leverage. Because there few opportunities for tenants looking to buy, homeowner can demand a higher price than he or she might otherwise get. In most rent-to-own scenarios, the tenant pays more rent than normal, with a portion going toward a down payment. The extra money acts as something of a forced savings plan for the tenant which is the key benefit in giving some people a way into the market, albeit at a slightly higher cost.

Here’s an example: The owner wants to sell the house for $200,000. The house typically rents for $1,000 a month. After a $10,000 deposit, a rent-to-own tenant might pay $1,300 a month – with $300 going toward the downpayment. On a three-year lease, the tenant would have paid $10,800 toward the downpayment. Add that into the initial deposit and the would-be owner will have $20,800 for a downpayment.

This can be attractive for those who can afford to buy a home, but might not quality for a mortgage. They may not qualify because of a weak credit score, or insufficient employment history. Their hope is that, by the end of the lease agreement, they will be able to qualify for a traditional mortgage from a bank.

The downside is that if a tenant decides to break the rent-to-own agreement, or decides the property is not suitable, they may lose their deposit, and depending on how the contract is written, may lose all the money that was put aside for the downpayment, or they might receive a very small portion back.

Additionally, in some cases your agreement may be void if your rent payment is late, or you fall behind in payments, putting your deposit at risk.

Contact me if you have any questions!

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