If you’re a long-term renter it is likely that at some point you have asked yourself “I wonder if my rent payments could ever count towards purchasing my home”
To answer your questions bluntly, yes, yes there are ways that rent payments can be credited towards the purchase of the property. This is otherwise referred to as “Rent to Own ” (RTO) or Lease to own (LTO).
How rent to own works is pretty simple, or at least this article is designed to explain RTO in simple terms…
How it works is: In a rent to own or Lease to Own agreement you enter into a leasing agreement, however, there is a clause added to the leasing contract that states that a portion of the tenant’s rent will be counted towards the future purchase of the property after a certain period of time. Typically, a down payment is needed as well.
Can you use Section 8 Vouchers for Rent to Own?
Yes, you can. HUD aims to make homeownership available to those receiving rental assistance from section 8 and other rental assistance programs.
First you must make sure that the Housing Authority that manages your section 8 housing choice voucher participates in HUD’s Homeownership Program.
Second, apply for Voucher homeownership with your PHA.
Renters with an RTO agreement can live in the property while making monthly rental payments. At the end of your RTO agreement, you are allowed to transfer your rental voucher to the Homeownership voucher program, which will offer you a mortgage and help you out with monthly mortgage payments for certain period of time.
Minimum Requirements for Rent to Own Agreements:
Keep in mind that each PHA has its own local requirements to with you must qualify as well, but the following requirements are standard for each PHA:
- You must be in the Section 8 housing voucher program
- You must have an income of at least $14,500 per year (some PHA’s have higher minimums, so make sure to ask them beforehand)
- You, or a member of your household, must have a full-time job (30 hours a week on average, minimum) and at least the past 12 months of continuous employment (This does not apply to the elderly or disabled)
- Your payments must be up to date and have paid on time for at least the past 12 months
- You mustn’t have any violations to the terms of your lease contract for the past 3 years
The Steps to a Rent to Own Agreement
For any RTO agreement to succeed it should create a win-win situation for all parties. To do this you will need to address a few important elements in the agreement. Below are the key factors to a successful rent to own agreement.
#1. Agree on Property Value. You (the renter) and the seller (landlord/property owner) will need to agree on the value of the home. To clarify, the total price that you will pay to buy the property.
#2. Agree on Down Payment. At the beginning of the year lease both you the renter and the seller will agree on a down payment that will counted or credited towards the purchase price of the home.
#3. Agree on Monthly rent. The majority portion of your monthly rent payment will be credited towards renting.
#4. Agree on Monthly installments payments towards final property purchase. This is the part of your monthly payments that goes towards the final purchase of the property you are renting.
Let’s say you and the owner agree to a purchase price of $200,000 for the property you are going to rent. (#1, Agree on property Value)
You agree that you will put down $10,000 at the beginning of a two year lease. (#2 Agree on down payment)
You also agree that you will pay $2000 per month and that $400 per month will go towards that purchase of the home. (#4 and #5 Agree on monthly rent and home payments)
At the end of two years, you have paid $9,600 plus your down payment of $10,000 towards the purchase of the property. Meaning that you have now paid a total of $19,600 towards the $200,000 price of your property. You now only owe $180,400.
After the two-year period, you finalize the sale of the home with the owner and take over the mortgage. Your rent payments will now be directly credited towards your mortgage. Congratulations, you are now a home owner.
You May be Asking is Rent to Own Right for Me?
To help you decide this you will want to consider the pros and cons of rent to own opportunities.
- Poor credit history can hold many people back from qualifying for a mortgage. Rent to own can eliminate that problem and give buyers a chance to rebuild while they invest their money towards becoming a home owner.
- If something unexpected happens, for example: you find that the property you were renting to own is damaged or unsuitable, you have more flexibility to adjust your contract than you would if you already had a mortgage.
- RTO can get you in your home at the agreed price point at the time of your lease. If the market increases and the value of the property goes up, the equity is yours.
- Down Payment. Renters will still need to come up with a suitable down payment. The down payment will go towards the purchase of the home, but typically rent to owners should expect to put down north of 3% of the home’s value.
- Risk of losing down payment. If for unseeable reasons you decline to move forward with the final purchase of the home, you run the risk of losing your down payment and whatever equity you might have gained with your monthly installment payments.
- Risk of the property owner defaulting. If for some reason the owner for the property lost the property during the rent to own period such as a foreclosure, the RTO agreement may then be at jeopardy.
- Trust, though you can protect yourself with properly worded contract RTO agreements can get messy and be risky if anything not above board is done on the seller’s part. Knowing and trusting the seller are very good things when it comes to RTO agreements.
Finding a Rent to Own home is not always easy, there are many RTO sites, scams and sellers that aim to deceive buyers and renters. Make sure you are entering agreements with reputable people. You must make sure that the agreement works for you and your budget.
Understand the contract. For contracts we recommend that you read every word. If anything doesn’t make sense or pushes you beyond your comfort zone, quickly address it and don’t sign until it is.
Take your time. Avoid being pressured by fear of missing out, or rushing the process in any way. Be methodical, thorough and do your due-diligence.
Things to be Aware of for Rent to Own
Maintaining the property may become your responsibility. This is a good chance to start thinking like a home owner. Meaning with RTO agreements typically you won’t be able to rely on your land lord when upkeep is needed.
Home Insurance, this is another expense that you should be aware of. Typically, this becomes the buyer’s responsibility.Rent to Own assistance might be a good option for many people that would like to purchase their own home, especially those with low credit scores. Hopefully, we have helped you understand Rent to Own agreements and figure out if they are a good option for you!