Can’t afford a house today; have you ever considered “rent-to-own” as an option?
Can’t afford a house today; have you ever considered “rent-to-own” as an option?
Renting a house means that you will be paying rent with nothing to show for it once your lease is over. But what if you want to own a home in the future, but cannot afford to purchase one today? Rent-to-own programs allow you to rent a home with the option to purchase it in the future. While the specific details can vary, here is a general overview of how rent-to-own works in Canada:
Agreement: The rent-to-own agreement is typically a contract between the homeowner (seller) or a rent-to-own company, and the tenant-buyer. The terms and conditions, including the purchase price, duration of the rental period, and option fee (down payment), are outlined in the agreement. Note, rent-to-own options involve two sets of contracts: a rental agreement and a rent-to-own agreement.
Rent Payments: The tenant-buyer pays monthly rent to the homeowner, just like in a traditional rental agreement. However, a portion of the rent is credited toward the future down payment or purchase price of the home. This amount is specified in the agreement.
Option Fee: At the beginning of the rent-to-own arrangement, the tenant-buyer usually pays an option fee. This fee is a percentage of the eventual purchase price, and grants the tenant-buyer the exclusive right to purchase the property within a specified period, typically one to three years.
Purchase Price: The purchase price of the property is determined and agreed upon at the start of the rent-to-own agreement. In some cases, the price may be locked in upfront, while in others, it may be based on the fair market value at the time of purchase.
Savings for Down Payment: During the rental period, the tenant-buyer is encouraged to save additional funds toward the down payment. These savings can help to increase the chances of securing a mortgage when it's time to buy the property.
Mortgage Approval: Before the option period expires, the tenant-buyer will seek mortgage financing from a bank or other financial institution. The mortgage approval process follows the usual criteria, including credit checks, income verification, and an appraisal of the property.
Purchase: If the tenant-buyer secures mortgage financing and decides to exercise their option to purchase within the agreed timeframe, they can proceed with buying the property. The option fee and the portion of the rent credited toward the purchase price may be applied toward the down payment or used to reduce the overall purchase price.
The rent-to-own formula described above can be a helpful option for individuals who have recently arrived to Canada, have faced financial challenges like bankruptcy or poor credit, or are unable to meet the criteria set by traditional financial institutions.
Rent-to-own homes are a good choice for renters who know that they want to save up to purchase a home, and do not want their rent payments to go to waste.
In summary,
Advantages: gives you time to improve your credit score and save for a down payment, lets you lock-in a purchase price, gives you a chance to live in the house before actually purchasing it
Disadvantages: can be more expensive than renting if you end up not purchasing the home, a locked-in purchase price could flop if home prices drop (not likely, but to be considered), you are still a renter until you purchase the property so tenant rules still apply, rent-to-own payments will be higher than mortgage payments until you purchase the home
If you would like to know more about this rent-to-own option, call or email Fred and Martin Mortgages, and it will be our pleasure to discuss what options are out there for you. It’s free, and could save you thousands.
Fred and Martin