If you're reading this blog post, you likely have heard about Rent to Own as an alternative strategy to getting into homeownership, and you want to know how Renting to Own works. I promise I'll get to that in a moment, but first, if you don't know what Rent to Own is - I'll briefly describe it.
What is Rent to Own?
Rent to Own is a path to homeownership for people who are unable to qualify for a mortgage today. It provides the ability to move into a home of your
choice today, rent it for a pre-agreed upon amount of time (usually 1-5 years), and then have the option to purchase it at a pre-agreed upon price. It can be great for people who have a stable income of usually at least $100,000 (market dependent), but maybe have some bruised credit or lack sufficient down payment to qualify for a mortgage today.
Rent to Own offers you time to build a down payment or repair your credit, all while living in the home that you can purchase in the future.
Got it?
You can also check out my other blog posts where I talk more about Rent to Own or visit Our Program page to read more as well.
So How Does Rent to Own Work?
At a high level, there are 4 steps to renting to own:
Apply --> House Hunt --> Rent & Repair --> Purchase
Now I'll dive into each step in more detail.
Step 1: Apply
The first step of any rent to own program is to apply.
This is similar to the process you would follow when applying for a mortgage. The rent to own company will collect information and documents to understand your financial and credit situation. This will determine your eligibility for the program.
*Note: Some Rent to Own Programs may require that you put down an initial deposit at this point in the process. Read the terms of the deposit agreement in detail to understand if the deposit is non-refundable or if it may be, in part or in whole, refundable under certain circumstances.
In Ontario, you will typically need a household income of at least $100,000 and a minimum deposit of $20,000 (or 4% of the purchase price of the home).
If you are accepted into the Rent to Own program, the expectations will be outlined upfront and usually provided in a written format like a Commitment Letter.
This includes things like:
Monthly costs (including rent, option fee and any other program fees)
Conditions and Mortgage Ready Plan (ie. pay down debt, open new trade lines, make payments on credit lines on time, continue to hold employment at same or greater income)
Approved Purchase Price (both current purchase price and future purchase price)
Type of Home that is permitted (ie. some programs may permit duplex or triplexes, some may not allow homes on well and septic)
Assuming you agree to the conditions in the Commitment Letter, you sign the letter.
Step 2: House Hunt
Every program is different - some may allow you to work with a realtor or your choice while others may require that you use a realtor that they recommend.
In either case, you will be able to go out with a realtor to view homes on the market that meet your approved criteria.
When you find a home that you like, your realtor will work closely with the Rent to Own company to put in an offer on the home. The offer will be put in under the Rent to Own Company (or their investor).
This is what differentiates purchasing a home from renting to own!
Rather than your name being put on the offer, the Rent to Own Company will be on the offer as they will be purchasing the home for you. They will hold the mortgage and they will be on title of the home.
If the offer is accepted, a home inspection will be completed. You may or may not be responsible for the cost of the home inspection - if it's not clear to you, ask!
If everything goes well with the home inspection, then it's a matter of waiting until the closing date at which point you can move in!
While you are waiting for the closing date, you will typically sign a few legal documents including a lease as well as an Option to Purchase Agreement.
In Ontario, the lease will be the Standard Ontario Lease Agreement.
The Option to Purchase Agreement (OTP) will outline how much your rent is and how much your option fee is. The option fee is an additional payment on top of your rent that will go towards accumulating the rest of the down payment that you will need to show the bank at the end of the Rent to Own Program. It is 100% credited back to you at the end of the program.
The OTP will also outline the date that you will purchase the home in the future, and at what price you will purchase the home for - the future purchase price is locked in and cannot be changed.
It may include other clauses including:
Responsibilities (lawn care and snow removal, other maintenance and repairs items)
Early Buy-Out Option
Option to Extend
As always, read the document carefully and ensure you understand it. Always seek legal advice as well.
Step 3: Rent & Repair
Once you move into the home, you will be renting but you typically take care of the home as if you already owned it. This includes things like taking care of lawn care and snow removal and any maintenance and repair items.
At the same time, you need to make sure to follow the Mortgage Ready Plan that was provided to you at the beginning of the program. T
he Mortgage Ready Plan should outline the specific things you need to do to make sure you are mortgage ready at the end of the program.
A good Rent to Own Program would provide the plan upfront and also complete check-ins throughout the program to ensure you're on track and provide guidance, as needed. They will also be available to assist if life circumstances arise that may impact your financial or credit situation - always be sure to check in with your Rent to Own Company before making any financial decisions such as purchasing a new car, opening a new credit card, loan or line of credit or taking on any new debts. This ensures that you don't make a decision that will detrimentally impact your ability to successfully exit the program by getting a mortgage.
During the rental portion of the program, the main focus is ensuring you make your payments to the Rent to Own Company on time, and follow the Mortgage Ready Plan.
Step 4: Purchase
When you reach the end of the Rent to Own Program, you will be able to submit a formal Purchase & Sale Agreement to the Rent to Own Company.
You will also need to work with a Mortgage Agent or Broker to
get approved for a mortgage. Most Rent to Own Companies will be able to refer you to someone who is familiar with Rent to Own arrangements to ensure a smooth transition of ownership.
And Now You're a Homeowner!
I hope this blog post shed some light on how a typical Rent to Own program works. While there are details that may not be covered here, this provides a fairly comprehensive overview of how the program works.
To end it off, here is a list of some of the benefits of Renting to Own:
Build Equity While Renting - The option fees that you pay each month go toward your down payment and as such you are building equity as you rent
Move Into Your Home Today - While you won't own the home initially, you have a plan to purchase it in the future giving you peace of mind and security - no more fears that the landlord will evict you
Locked in Future Purchase Price - No more chasing the market. You know exactly what price you will be purchasing the home for so you know exactly how much you need to have saved for your down payment.
Do you have any questions about how a Rent to Own Program works? Leave a comment below.
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