Rent-To-Own Agreements

Saving up for a large down payment can be a barrier for many would-be homeowners. Even then, a poor credit score would be disastrous to the process. Responsible renters who find themselves in this situation may find the perfect solution in a rent-to-own agreement. In this week’s article, we are going to explore these unique arrangements and how they affect renters and homeowners alike. 

Lease-Option or Lease-Purchase

The basis for any rent-to-own agreement is that part of the tenant’s monthly bill will go towards a down payment ultimately building home equity. While almost all agreements include this and a smaller 2-5% down payment to start, there are two main approaches:

• Lease-Option. This type of contract gives you the option to buy the home when the lease expires, however you are not obligated to follow through with the purchase. At the end of the lease, the option will expire and you have no further financial commitment to rent or buy.  
• Lease-Purchase. In this scenario, the renter is legally required to purchase the home in the agreed-upon amount of time. The idea is that by the end of the lease, the renter will have paid enough for a down payment to qualify for a regular CMHC mortgage, as well as boosting their credit score. 

What Sellers Can Expect

Landlords can often benefit from this arrangement in a few different ways. For one, they get to pocket the portion of the monthly payment designated for rent. They can then use that money towards an existing mortgage or anything else they choose. Even if it is a lease-option and the renter decides not to buy, the landlord is entitled to keep the original deposit. Another great benefit of rent-to-own is that the homeowner typically isn’t in charge of renovations or home repairs anymore. 

What Tenants Can Expect

Tenants are often required to pay a 2-5% down payment on the full purchase price of the house upfront, in addition to paying monthly. That being said, that amount is usually much more attainable for renters than saving up 5-20%. Rent-to-own also allows potential homeowners to give their new house a “test drive.” That means having the time to figure out the house, the neighbourhood, and everything that comes along with it before you decide to officially buy. 

For renters who dream of homeownership but just can’t set aside a huge down payment right now, consider how rent-to-own could help you achieve your goals. Rent-to-own agreements aren’t for everyone, so it’s important to speak with a real estate professional to find out if this type of program is right for you! Contact our team at Source Mortgage today to see what options are available for your situation.