What is Rent to Own?
A Rent to Own contract could be the answer for someone who is renting but is also having a hard time getting their down payment together. Rent to Own contracts usually are between 1 and 5 years long and can give the client the time they need to implement strategies on increasing their down payment or even improving their credit. In the Lower Mainland, Rent to Own’s are becoming more popular as housing prices are increasing, and renting seems inevitable. In fact, there are properties that are being built with Rent to Own financing in mind.
Initially, the contract is signed just between the renter (the buyer) and the Landlord (the seller) that states an agreed price, length of time of renting to own, and market rent (typical rent of a similar property) with the excess going toward down payment (usually $200 – $400/month). The lender is not involved yet.
For example, market rent for your property goes for around $1000.00. You agree to pay the Landlord $1400.00/month. The extra $400/month goes into an account that the Landlord has in place for you for the down payment.
Regardless of the lender, the Landlord must keep pristine records of the extra money coming in and can show the history of any excess deposit. When the Rent to Own is registered on title, there will be a clear indication as to how much of the monthly payments are directed toward the deposit.
The client will want to work with a team of property purchase professionals that will strategize Action Steps to make a seamless Rent to Own experience. The client`s team would be:
- Get pre-approved! In the pre-approval process, the Mortgage Professional will be able to advise on improving credit or the need to increase employment income if need be.
- As well, the Mortgage Professional understands lender policies and guidelines for Rent to Own contracts and will be able to advise on how to properly set up the Rent to Own.
- Make sure that your lawyer is familiar with Rent to Own contracts and that they work closely with the Mortgage Professional who knows what the lender is going to expect. This relationship is very important and one that should not be overlooked.
The down payment continues to grow over the life of the Rent to Own contract. At any time, you can add lump payments to the down payment, simply by giving the Landlord a bigger rent check. Keep in mind, the Rent to Own contract could stipulate that the down payment is non-refundable. Make sure you read the fine print and work closely with your mortgage professional and lawyer so that you clearly understand the terms of your Rent to Own contract.
The bank does not get involved until the time the renter (the buyer) makes an offer to purchase to the Landlord (the seller). The renter does not have to qualify for a mortgage at this point because the Landlord continues to carry the mortgage on the property.
Rent to Own Properties can also be facilitated through a company such as a condominium developer. For example, the developer could offer a Rent to Own contract when entering a rental lease with an owner-occupied property that the client wants to rent. The client may be charged a contract fee upfront (for example $10,000) to enter the Rent to Own contract. At times all or a portion of this contract fee can be used toward the down payment pending on what has been negotiated within the Rent to Own contract.
Over the course of the Rent to Own some of the obstacles to financing you will consider are:
- How to improve your credit rating
- Consider applying for an RRSP loan to further establish credit and take advantage of tax benefits
- Consider refinancing any outstanding credit
- Consider job changes to increase employment income
- Consider other sources to increase down payment
Rent To Own contracts are more than just paying rent to the Landlord and applying the rent toward the purchase of the property. There are details that you need to know when entering into a Rent To Own Contract.
