Rent to own – Let’s start with the basics.
If you are planning to buy a home but your income leaves something to be desired, don’t despair. There are certain ways you can still own a home, though they’re not as straightforward and conventional as a traditional mortgage. Rent to own, which is also known as lease to own, permits you to rent a residence with a choice to buy the home within a defined period. A share of your monthly rental costs will go toward a down payment.
In short, Rent to own is a legally documented transaction with which a tangible property, such as consumer electronics, furniture or home appliances, is rented in exchange for a monthly payment. Along with your monthly payment and agreed upon terms, you have the option of purchasing at some point during the contract.
Tip: Renting to own provides you extra time to work on your credit score which results in increasing funds used for a down payment. This also permits you to use the property/product before deciding if you actually want to own it.
Understanding Lease Option vs. Lease Purchase
While making a rent-to-own agreement, there are two available choices: a Lease Option or a Lease Purchase agreement. A lease option provides the renter the choice of whether to buy the property/product, or not. A lease purchase agreement requires the renter to purchase the property/product at the end of the lease term.
Note: Make sure you understand all aspects of the agreement before signing any paperwork.
How it works:
The details of rent-to-own depend on the renter lease agreement. This agreement should state the final purchase price of the property/product. But be cautious, the agreement may also state that the price can increase each year.
In a nutshell, a renter pays a set monthly price for a product or property. A portion of that monthly payment is going towards a final purchase price, or a down payment for very large purchases. Once your payments are complete, or if you choose to payoff earlier, you will own the product you’ve been paying on.
Most agreements contain a condition that the renter may buy the property/product at any point during the lease. Often times consumers choose to rent-to-own because they’re not in a stable position. This type of lease can help you when there’s items you need, but don’t have a lump sum to spend. If your situation changes during this time, such as getting a pay raise or a better job, you can always choose to purchase.
Let’s understand it with an example:
n this example we’ll look at at rent to own housing situation. This is very common these days, especially with younger generations who aren’t making as big of purchases as previous ones.
Suppose, a monthly payment of $2,000 may designate that $300 of the money goes to your down payment. At the end of a two-year lease, you should have $7,200 in money directed to a down payment. The $300 monthly payment, which is also known as the rent premium, is placed into an escrow account by the owner.
Does “Rent-to-own” have any effect on consumer credit?
You can purchase TVs, furniture, cars and even houses by rent to own agreement. As with a mortgage or payday loan, you usually make a monthly payment for a fixed period of time. Still, while timely mortgage payments may aid your credit, your rent-to-own expenses typically have no effect on your credit score at all. If a rent-to-own contract does appear on your credit report, it’s typically going to hurt instead of helping your scores.
To make it simple, a rent-to-own organization isn’t a lender, so they don’t report your good payments to credit. This means you’re not accruing good credit for on time or early payments. But rest assured, if you stop paying and face repossession, lawsuits, or other legal actions, this could show up on your credit.
Any kind of rent-to-own agreement could make its way onto your credit report only if you end up breaking the lease. After breaking a lease, you could end up going to court. Credit bureaus frequently check court records for decisions and that information can be added to your report.