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Renting can feel like a waste as every payment you make doesn’t help you build credit or pay towards owning the place you rent. Unfortunately, renting is usually the only option for many people as it’s more affordable than buying a house. That’s where the rent-to-own program comes into play, it was created with the purpose of helping out those with poor credit to eventually become proud and established homeowners.
The rent-to-own program involves entering an agreement between you and your landlord or rent-to-own company. Essentially, the landlord or rent-to-own company will rent out a house to you similar to how a landlord would with an apartment. The difference lies in the way the rent payments are used. The rent payments will not only pay your rent but a portion would be saved to go towards the purchase of the house you’re renting. This is referred to as “rent credit”.
Rent-to-own programs typically last between 1-to-5-years, during which (or at the end) you can choose to use your rent credit to help you purchase the property. If you do not purchase the property by the end of the lease, you’ll lose all the rent credit.
Strictly speaking, there are two types of contracts that are offered, known as “option-to-purchase” and “lease-purchase”.
Each rent-to-own home comes with a particular rental contract/agreement that the tenant must adhere to if they want to remain living there and have the opportunity to purchase the home. But generally, you can expect the following when you enter a rent-to-own agreement.
After the agreement has been confirmed, the tenant will make regular payments, usually on a monthly basis, over several years (1-3 years is most common). The payments are divided into two parts, with one larger portion (about 75%) of each payment going toward the rental fee and the other (about 25%) going toward the down payment and eventual home equity.
Once the lease is over, if the tenant still wishes to or is obligated to buy the house, they will have hopefully paid off enough of the down payment and raised their credit score sufficiently to qualify for a regular CMHC (Canadian Mortgage and Housing Corporation) insured mortgage. If the tenant’s agreement to purchase the home is optional and they don’t like the house or have any other reason not to buy it when their rental term ends, they can walk away from the deal.
With most rent-to-own agreements, the potential tenant will be required to pay what’s known as an “option consideration” or “option money”. This is a non-refundable, but a negotiable deposit, which usually amounts to about 2-5% of the home’s final asking price.
The option consideration is a separate contract that gives the tenant the right, but not the obligation to buy the house at the end of the rental period. If the tenant doesn’t wish to pay for the option consideration, the landlord might still let them rent the home, but they will not have the right to purchase it at the end of their lease.
Depending on the terms of the agreement, the full sum or part of the option money may go toward the tenant’s eventual down payment on the home, but again, every contract is different.
The terms of the rental contract will dictate what the new potential homeowner ends up paying for the home if and when they decide to buy it. Under some contracts, the final asking price for the home will be agreed upon and locked in before the tenant moves in.
However, some rent-to-own contracts state that the asking price will only be determined at the end of the leasing term and will be based on the home’s appraised market value. Actually, the majority of tenants prefer to have the asking price locked in because the real estate market is always fluctuating.
For the sake of argument, we’ll say that the rent-to-own agreement is for a 3-year contract. The renter agrees to pay $1,000 in rent per month, with an additional $500 per month that goes toward the down payment. Here’s how it will work:
So, by the end of their 3-year rental contract, the prospective homeowner should have invested $18,000 toward the down payment on the home. Something to keep in mind is that they’ve also paid $36,000 in rent over those 3 years, all of which will not be going toward the initial mortgage price. This means that they’ve invested $62,750 towards the home, but only $26,750 will actually go towards the final asking price.
When applying for any type of mortgage product, avoid these common application mistakes.
If you believe you’re a good candidate for the rent-to-own program, you should be aware of the advantages and disadvantages for both the seller and the renter. It’s very important to know what they are before you sign any contracts.
Just as there are advantages and disadvantages for the tenant, there are advantages and disadvantages for the seller.
This program is only for those who are serious about owning a property and already have a homeowner mindset. The ideal client for the Rent-to-Own program is someone who:
The Rent-to-Own program gives you the ability to begin investing in owning a home today. This program will help you to be more financially responsible, stay on track and go through the necessary steps to build the equity and credit rating required to qualify for a mortgage. The Rent-to-Own program will put you well on your way to becoming a homeowner in no time, and you also receive the added benefits of a stronger credit rating and real equity in your property.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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