First of all, let’s define the general premise of a rent-to-own program. The typical path to homeownership is buying a home using cash or a mortgage with either a down payment assistance program, or a downpayment. Mortgages require a certain financial standing, (stay tuned for future posts about what lenders are looking for). Due to either credit or downpayment issues, many of us do not have the capability of qualifying for a mortgage at this time. Rent-to-own programs allow you to go through a less strict process to move into a home that you can buy in the future.
There are many rent-to-own programs out there, but two of the most popular ones that I have encountered are Home Partners of America and Divvy Homes. The basic premise of these programs is they will allow you to move into a house and rent it in the hopes of buying it in the future. While you live in the house, you are acting like a tenant and the company you choose is your landlord. The most common reasons people choose to lease-purchase a home are lower credit scores, shorter employment history, lack of downpayment funds, and fear of committing to a home while relocating to a new area. During your lease, you are able to build your credit, gather savings, or familiarize yourself with the area.
How rent-to-own works:
1. Application:
Home Partners and Divvy Homes have different criteria that they require for the application but here is the rough minimum criteria that they look for: Credit score of 550, employed for the last 12 months and average income of $45,000 per year. You apply through their online portals and they will ask you for a few documents like your tax statements, bank statements and permission to pull your credit and verify your employment.
Please consult with their websites for more up-to-date information or a real estate agent who is partnered with them! Remember- I can find you a real estate agent ANYWHERE in the country through my network, just go to my contact me page!
2. House Shopping:
Once you are approved to go through their programs, you get to go house shopping! Your real estate agent can help vet properties for you that will be eligible. Home Partners and Divvy Homes will work as a “cash buyer” and purchase whichever home you fall in love with as long as it’s approved with them! The main items they’re looking for are – good condition, no damages, good investment, able to be rented out (certain neighborhoods have stipulations in place that do not allow tenants), traditional sales (not foreclosures, etc). Once you fall in love with a home that you are eligible for, your Realtor will work with the rent to own program to submit an offer and negotiate on your behalf!
3. Under contract:
Once “you” are under contract, you will have a chance to attend the inspection and submit any requests that you wish to be repaired by the sellers. The Realtor and the company will fight to negotiate for the necessary repairs. It will work like a normal transaction between the company and the seller. Once the home closes (2-4 weeks), you are required to submit a deposit (2% of the purchase price for Divvy Homes and 2 months rent for Home Partners of America).
4. Lease in place:
Now that the home has closed, Home Partners of America or Divvy Homes will officially be your landlord and you will be able to move into your future home! At any time during the lease, you are able to purchase the home with a 60 day notice. You will have to go through a typical mortgage process (~30 days) and qualify before being able to purchase. Divvy Homes enrolls you in a credit repair company and helps you build up your credit during your lease.
5. End of lease:
Their leases typically last in one year increments and can be renewed for up to 3 years. After 3 years, they will re-evaluate whether they’d like to renew with you. Each year the rent will increase and so will the “buy-back” price.
How to choose the right rent-to-own program
The biggest difference about Divvy Homes and Home Partners of America is that Divvy Homes allows you to build equity as you live in the home. With each rental payment, roughly 25% of the payment goes towards your future down payment. Upon move in you are required to put down a 2% deposit (which will go towards your future down payment, and is roughly the same as first months, last months and security deposit for a rental). If you choose to leave and not purchase the house, you still get a portion of the equity you have built back as opposed to other rentals where you never get money back.
Home Partners does not allow you to build equity with the rental payments, but it does allow you to contribute the two month deposit towards the home purchase. If you don’t end up buying, they will return the deposit to you at the end of your lease if the home was maintained well.
What are the drawbacks to a rent-to-own program?
The biggest downside to a rent-to-own program is the higher rental amount. Typically, the rents are higher than an average market rent. It is not always the cheapest option to rent through these programs. Another drawback is you are not allowed to purchase foreclosure homes or homes in worse condition. Some of you might be handy and would prefer to purchase a cheaper property and fix it up yourselves, these programs do not allow that. The homes have to be in good condition.
Despite the drawbacks, the programs are a good option for some. I would advise discussing your financial situation with a mortgage lender who would be able to provide you with a reasonable timeline for your mortgage eligibility. Perhaps you are much closer to homeownership than you think, in which case these programs might not be the right option for you.
Who would benefit the most from a rent-to-own program?
If you find yourself in one of the situations below, you might benefit from a rent-to-own program.
- Relocation: Are you moving to a brand new city and afraid of committing to a neighborhood? I totally get it! When I graduated from college, I moved from South Carolina to Seattle without ever visiting! It was scary for me to commit to a neighborhood and I was just looking to rent! I waited until I had lived there for a week before deciding on where I wanted to be. So if you are moving to an area but want to have a “trial run” of the neighborhood for a few months before committing, this is a great option for you. This way if you decide you made the right decision, you do not have to deal with searching for a house again, moving costs, or doing the dreadful packing and unpacking routine mere months after moving! On the other hand, if you realize you made a wrong decision about a neighborhood, you can take a big breath and celebrate that you didn’t purchase a home you wouldn’t want to live in for the foreseeable future.
- Low Credit: Do you have the savings for downpayment and are working on building your credit score? Maybe your lease is running out in the next few months but you do not want to renew for another year because you’re ready for homeownership? Rent-to-own could be a great option for you. You can choose the house you want to purchase and work on rebuilding your credit during your lease!
- Lack of Downpayment Funds: Perhaps you just need to save for a few more months but you need to move ASAP. This program could be great for you. You need roughly 2% of the purchase price, or 2-3 months rent up front as a deposit for these programs, so while you save money, you could at least be living in the home you would want to live in.
- Don’t want to miss out on a dream home: Perhaps you weren’t wanting to purchase for another year or two, but as you’re scrolling through Zillow you find a home that you CANNOT pass up. This program could allow you to move into your future home and deal with selling your home after the move. Selling your home can be stressful whilst living in it, and this program could provide you with the reprieve that you need.