During the early days of the mortgage business, brokers would require a lot of paperwork…
Now you can listen to our blog, “Rent-to-Own Program Canada” while on the go.
Want to own a home in future but don’t have the money to buy it today? The rent-to-own program is for you. With rent-to-own programs, you can rent a home with the option to purchase it in the future. Not sure how? Keep reading to find the answers to all your questions.
What is Rent-to-Own?
A rent-to-own program is an agreement that you need to sign with either landlord or a company. In this, you rent a home from your landlord or from a rent-to-own company, with a portion of your rent going towards the down payment of the home. This is often called a rent credit.
This puts you at an advantage in that you can purchase the property either during your lease or once the lease is over. However, it is only your choice, and you are not forced to purchase the home. The term of the agreement can range from one to five years. So, if in the middle of the agreement, you decide against buying, you will lose the rent credit that you have built up.
You may not be bound to purchase the house, but your landlord is bound to sell the home to you. The landlord or company cannot sell the home to anyone else when in the agreement.
How Does Rent-to-Own Work?
In rent-to-own, a homeowner or an investor rents out his house that is in his name. The potential homeowners or tenants rent the house and make their regular payments to the owner. Every rental home contains a rental contract or an agreement that the tenant must adhere to if they have the mind of living in it forever.
Mainly, there are two types of agreements or contracts: one, option-to-purchase and two, lease-purchase. If the renter picks the option-to-purchase, they get to sign an agreement that states that they have the option, but with no obligation to buy the house when the rental term is over. If they pick a lease purchase, then they agree to buy the house at the end of the term.
The Option Consideration
The potential tenant will be asked to pay an “option consideration” or “option money” in most rent-to-own agreements. This is a non-refundable, but often negotiable deposit that typically amounts to 2-5 per cent of the total asking price of the home. The option consideration is a separate contract that allows the renter the choice to buy the house at the end of the rental period, but not the duty to do so.
If the tenant refuses to pay the option consideration, the landlord may continue renting the property to them, but they will not be able to buy it at the end of their lease. The complete amount or a portion of the option money may go toward the tenant’s future down payment for the home, depending on the conditions of the agreement, but every deal is different.
After the agreement is confirmed, the tenant will make regular payments over a period of time, normally on a monthly basis (1-3 years is most common). The payments are split into two parts, with the bigger portion (about 75 per cent) going toward the rental cost and the smaller piece (approximately 25 per cent) going toward the down payment and ultimate home equity.
If the tenant still wants or needs to buy the house once the lease is up, they should have paid off enough of the down payment and improved their credit score to qualify for a conventional CMHC (Canadian Mortgage and Housing Corporation) insured mortgage. If the tenant’s agreement to buy the house is optional, and they don’t like it or have another reason not to buy it when their renting term ends, they can back out.
The parameters of the rental contract will once again determine how much the new potential homeowner pays for the home if and when they decide to buy it. Before the tenant moves in, some contracts stipulate that the final asking price for the home be agreed upon and locked in.
Some rent-to-own agreements, on the other hand, provide that the asking price will be established solely at the end of the lease period and will be based on the home’s appraised market worth. Because the real estate market is continually fluctuating, the majority of tenants prefer to have the asking price locked up.
Is Rent-to-Own Program Right For You?
Only individuals who are serious about purchasing a home and already have a homeowner mindset are eligible for this programme.
The Rent-to-Own program’s ideal client is someone who:
- aspires to become a homeowner as quickly as feasible
- Ownership of the home is a source of pride for him.
- Recognizes that real estate is a fantastic method to accumulate wealth.
- Has previously struggled to obtain financing or been turned down by a mortgage lender
Pros & Cons of Rent-to-Own Program
Gives you time to improve your credit and save for a down payment
Lets you lock in a home purchase price
Gives you a chance to live in a home before buying it
Allows you to move to your dream house even if you can’t afford it today
Can be more expensive than just renting if you end up not purchasing the home
A locked-in purchase price could backfire if home prices fall in the future
You are still renting in the meantime, which means you do not have full control over the home
Rent-to-own rent payments will be higher than the home’s mortgage payments
The Bottom Line
The Rent-to-Own programme allows you to start investing in owning a house today while avoiding the rent trap. This programme will assist you in becoming more financially responsible, staying on track, and taking the measures necessary to establish the equity and credit rating necessary to qualify for a mortgage. You’ll be well on your way to becoming a homeowner in no time with the Rent-to-Own programme, and you’ll also benefit from a better credit rating and genuine equity in your house.
At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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