Is Rent-To-Own Actually A Scam?

When you decide to move into a new home, there are several available options for purchasing it. You can take on a mortgage or even rent it if you haven’t decided on settling into a property. 

Another homebuying option is renting-to-own, the halfway point between full ownership and leasing. However, there’s a lot of skepticism around this option because of its high price point. 

Is a rent-to-own lease a scam, or is it a viable way to purchase a home? Check out these frequently asked questions about the rent-to-own process to see if it’s a frugal option or simply a scam to charge renters extra money. 

What is renting-to-own?

When you rent a home, you agree to sign a lease that promises you will reside in that house for an extended time. Most leases last for one year, although it’s possible to work out a more extensive lease with your landlord.

Renting-to-own is slightly different in that after your lease period is up, you have the option of buying the property and having full ownership of it. A portion of the rent you pay each month goes toward the price of the house, and you’re able to ultimately purchase the space you’ve already spent time settling in.  

How does it work?

Signing a rent-to-own agreement establishes a rent credit line that your landlord creates. For example, if you pay $1,958 each month for a 2 bedroom space (the national average for rent), a certain percentage of that will go toward the final buying price as rent credit. 

The longer you stay on the property paying rent, the more credit you receive toward your potential down payment. As you pay from month to month, these funds accumulate to reduce the price of your home.

Is this a better deal than buying upfront?

The short answer is yes and no. You’ll end up paying significantly more in the long run if you end up buying your home at the end of your lease period because of the time spent paying rent. However, there are a lot of other factors that might make this an ideal situation for a home-buyer. 

Renting-to-own also comes with a non-refundable fee that can range between 1-5% of the overall cost of the home. This option fee is what secures your ability to choose to buy the home at the end of the leasing period. A fee like this can be financially inconvenient, but having the assurance of a buying option in a competitive housing market may outweigh the cost. 

What are the benefits of rent-to-own homes?

Credit score plays a major role in choosing to rent-to-own a home. If you still need some time to boost your credit and pay off debt, you can use this home buying method to achieve financial security while still living in the kind of home you want. 

This method also simplifies the home buying process because the bank becomes less involved. Approvals and agreements are between the seller and the buyer, not the buyer and the bank. For people that struggled with getting approved for a mortgage, rent-to-own might give them some autonomy over their housing purchase. 

If you are fresh out of college and wondering about buying a home, check out this article on Buying A Home With Student Loan Debt.