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Can you really afford to rent to own?

Breaking the rent cycle to become a homeowner sounds like a dream come true. But is it realistic for you?

If you don't understand the fine print, a rent-to-own agreement can end up costing you more, with no home to show for it. Here's what you need to know.

Buyer (as a renter), beware.

You probably already pay rent. So putting it towards a down payment to eventually own the home you live in (versus the forever-rent scenario) sounds like a welcome pathway to get into the real estate market.

But perhaps this idea is more 'welcome' for the company, developer or private investor who offers it — because it can come with a few hitches that may not work in your favour.

Like, the money you'll lose to them if it doesn't work out. And, like, a rent-to-own contract that an accredited lender may not accept for mortgage approval.

The rent-to-own idea can still work, but let's outline what to look for and your risks. (You can also talk to one of our expert brokers for help.) If it does work, it can put you years ahead to own your own home.

A rent-to-own agreement is your normal rental lease, with a separate 'purchase option' that says you can buy the property (or decline to buy) after a period of time (typically 1-5 years). It outlines an initial down payment fee along with extra rent money (called rent credits) that accumulates towards your down payment amount.

The caveat? If you decline or can't buy for any reason, you could lose some or all of your down payment.

Here's a Rent to Own example

Purchase Price set: $350,000 (minimum 5% down; lender requirements apply)
Non-refundable option fee paid upfront: (2.5%): $8,750
Purchase option set at 3 years: $350K - 8,750 = $341,250 owing
Monthly rent: $1,600 (including $550 towards down payment)
Down payment saved after 3 year
s: $19,800 ($2,700 more than 5% of $341K, which can be used towards mortgage closing costs)

For this example, default insurance premiums of about $13K will also be added to the mortgage. Use our mortgage payment calculator to see what your payments might be if you choose to buy the home at the end of 3 years.

And keep in mind that you're still paying 'market rent' that doesn't go directly towards buying the home.

First thing you should know?

It's actually hard to get a rent-to-own mortgage application approved by an accredited lender.

That's a big obstacle because if you can't get that accredited approval when it's time to stop renting and buy, it'll cost you more:

  • You may end up forfeiting the money you paid towards a down payment and have to continue renting
  • You may have to pay a much higher mortgage rate for an approval through an alternative or private lender (we can still help you, though your ability to afford the loan will be impacted)

Plus, there may be other obstacles in your rent-to-own agreement that can result in losing your down payment amounts — for example, if you don't have the income or credit qualifications by the time you go to buy.

Let's look at the Pros and Cons of Rent to Own:

Rent-to-Own PROS Rent-to-Own CONS
Rent payment Rent and down payment are combined into one payment Monthly rent amount may be higher than normal
Down payment Commits you to save up (which you should do anyway if you want to own) You're locked into the extra amount as part of your rent; you may not have budget room for other savings
Rent Credits (extra rent put towards down payment) Accrues your down payment within a specific time to buy the home If you don't end up buying the home, you could lose this money
Purchase option fee (or deposit); typically 1-3% Taken off the purchase price when you buy (goes towards your down payment) Usually non-refundable and paid upfront; if you don't buy the home, you likely lose this money as a 'fee'
If home price is set (no caveats for price changes) If home price increases, you may get that extra equity for free If home price decreases, you may still have to pay the original higher price
Credit or income issues Allows time to resolve before seeking a mortgage loan If not resolved when time to buy, you may not qualify for a mortgage and you may lose down payment money
Exclusive rights to buy No one else can buy during your purchase-option period If you don't buy, you may have to find another place to rent
Living in the home Can save you time and moving costs You'll have less rights as a renter and may need to cover extra home maintenance costs
You're still a renter But now some of your rent is going towards buying a home If you break your lease (miss a payment or damage property), you may forfeit your down payment amounts and the right to purchase
Mortgage approval Allows time to improve credit or income; if you get approved, you'll own your home! May be hard to get from an accredited lender; alternative or private lending options can cost more
Your mortgage rate If you stay on track, you may qualify for a lower rate Alternative and private lending options can mean higher rates
Overall benefit or risk Stay on track to own your home, possibly building home equity earlier than traditional buy If something happens (change your mind or don't get mortgage approval), you may lose the money you've saved AND be no closer to owning a home
Rent-to-own options There are local and national companies, private investors (often landlords) and programs that may offer a model that works for you The stated benefits often don't outline your risks. Know your costs and have a lawyer and expert mortgage broker (like us!) look over your purchase-option contract

Despite this healthy list of pros and cons, there's more to know to help your decision.

What do you need to sign for a Rent to Own?

In addition to your rental agreement, you'll sign either a lease-option or a lease-purchase agreement, with the latter incurring more penalties should you change your mind.

The rent-to-own agreement typically covers details such as:

  • Agreed-upon home purchase price (not always set; some contracts use the value of the home at time of purchase)
  • Initial down payment amount, typically 1-3% of the price (often a non-refundable purchase-option fee)
  • Lease term (rental period) — expiry date upon which you'll either purchase the home or decline to buy
  • Monthly rental payment amount that includes the market rent charged plus an amount that accrues towards a down payment (called rent credits)
  • Possession date of the property
  • Details of what happens to your money should you decline the purchase offer or can't get mortgage approval
  • Home maintenance responsibilities (for which you'll cover costs)

There may be more conditions or details, depending on the contract. Each rent-to-own contract may be different — having a lawyer and expert mortgage broker review the one presented to you is important.

What should you look for in your rent-to-own agreement?

If you look up the website of a rent-to-own company near you, the explanation of your process and all the support they promise to provide may not include important details about what you risk:

  • Will you receive your initial down payment and rent credits back if you change your mind and don't buy?
  • Will you receive your initial down payment and rent credits back if you can't get a mortgage approval?
  • If you break your lease for any reason (e.g. missed payment, damage to the home or property, or you have to move), will you lose your down payment amounts?
  • Are the rent credit amounts placed into a trust that the landlord can't access?
  • What happens if there's a dispute with the landlord — can they cancel the agreement or withhold your down payment money?
  • What if you find something really wrong with the home's structure or a system that requires a costly fix?
  • What happens if the value of the home increases or decreases compared to the purchase price initially agreed upon?
  • Will you have the option to continue renting if you decline the purchase offer?
  • Are you responsible for extra home maintenance costs while you rent?

Getting answers to these questions can help you determine if the rent-to-own pathway is right for you.

Here's what can prevent you from getting a mortgage approval

An accredited lender may have different requirements than what is set out in your purchase-option agreement:

  • To avoid fraud, the agreement can't be current-dated (there's usually a time period between 1 and 5 years for the down payment amounts to be accrued)
  • The value of the home may have to be based on the original price and not the current value (unless it's lower)
  • Your rent-to-own agreement may need to be registered on the home's title at the beginning of the contract (for example, this condition is required through our in-house lender, THINK Financial)
  • A market rent appraisal determines how much rent you should be paying, and if it exceeds the amount allocated, further income qualification may be required
  • Home appraisal determines the current value in light of the original purchase price agreement, which may highlight an inconsistency that works against loan approval
  • Some lenders require that you receive your down payment back if the application isn't approved
  • In the case of credit issues, your credit score or debt load may have not improved enough to meet lender requirements
  • Most accredited lenders will only consider an insured mortgage (less than 20% down) for Rent to Own

So, even if your income and credit are sufficient for the home you wish to purchase through a Rent to Own — the purchase-option agreement itself may prevent your mortgage approval.

You may be able to seek approval as a straight home purchase from the owner, versus under a rent-to-own agreement (extra fees may apply). But if the owner or original agreement doesn't allow that option, you may lose your down payment money and the chance to buy the home.

Get a second (mortgage) opinion before you sign!

It's important to have a lawyer and experienced mortgage broker (not connected to the company offering the deal) look over your agreement.

Before seeking a rent-to-own arrangement, knowing where you stand on qualifying for a mortgage is a really good idea. Our expert brokers can help you pre-qualify to see what you can afford and how your details look in the eye of the lender.

What if there's something wrong with the home?

As always, we recommend hiring a professional for a full home inspection to uncover the potential for costly repairs — in this case, before you sign a rent-to-own agreement. Even though you may not end up buying, you'll know ahead of time whether the home is what you expect, which may save you thousands in repairs you didn't expect.

Despite a home inspection, if a major home repair issue were to come up during your rental time, make sure you know your maintenance responsibilities before signing an agreement.

Where can you find a rent-to-own arrangement?

If you search the Internet, there are local and national companies that may offer this stream in your area. There may also be individual private investors (landlords) that will provide this pathway.

We recommend doing thorough research. Ask a company if you can talk to someone who has already purchased their home or a current renter for their experience in dealing with the company. If a private investor, the 'devil's in the details' — ensure your agreement is solid.

There may also be programs funded through CMHC that can offer a pathway, depending on your circumstances.

If you decline your purchase offer, can you still keep renting?

If you decline the offer to purchase when the time arrives, the company or owner may allow you to continue renting the property. But if they decide they want to sell, you may need to move right away.

Skip the Rent to Own, but still save up to buy a home.

If you commit to saving extra money every month on your own, you won't risk losing it through a rent-to-own agreement and will have more options on what to do with your saved cash. We can help you identify the home price that works for you, and how much down payment you'll need to save to buy within a certain time frame.

When you have enough to buy a home, your application is handled as a typical purchase based on your qualification details, without a rent-to-own agreement interfering with the loan approval.

Or perhaps you'll decide to keep renting but put your saved money toward a different investment product.

Need help improving your credit to own a home?

Talk to us! Our expert brokers and Alternative Lending team can outline the strategies you need to work towards the 'approved' stamp from a lender or to get your credit back to where you'll qualify for better rates to afford a home.

If money is tight, rather than risk losing your down payment through a rent-to-own agreement that falls through, we can help you find the most efficient (mortgage) path for your success.

Do your homework to make the dream work.

Remember, it's important to run your rent-to-own agreement by a lawyer, and talk to an expert True North Mortgage broker to understand your mortgage qualification details and what house price you may be able to afford to put yourself ahead of the mortgage end-game.

Check around and do your research, and be honest with yourself about how well you think you can stick to the program to buy your home.

If you decide that a Rent to Own isn't for you? We can provide credit, debt and down payment strategies to help put your dream of home ownership within reach, and improve your chances of getting approved for a mortgage — for your best rate to save thousands.

Wherever you are in Canada — no matter your details, we make your pre-approval easy. We're a trusted relationship you can come back to for any advice along your (mortgage) way.

After all, we've been helping prospective homeowners, just like you, for over 15 years, with exceptional 5-star service that puts you first.

More Rent-to-own FAQs

How much down payment do you need for Rent to Own?

The minimum total down payment required can be as low as 5%, depending on the home price. A rent-to-own agreement may typically build in more than 5% to help cover required mortgage closing costs or to improve the chance of getting mortgage approval.

Are there any extra costs associated with a rent-to-own program?

Depending on the rent-to-own agreement:

  • There's usually a non-refundable purchase-option fee (typically around 1-3%) required upfront
  • Rent credits built up through your monthly rent payment may also become non-refundable if you break your lease or decline the purchase offer
  • You may be required to cover more home maintenance costs
  • If you break a lease-purchase (vs. a lease-option) agreement, more penalties may apply
  • Other fees may be charged, such as title registration
Can I use the time involved in a Rent to Own to improve credit or income?

If you're serious about owning a home and can make all the payments, the rent-to-own structure may help improve your credit for mortgage approval by the time you go to buy. However, if there are more issues to overcome, you may lose your down payment money and be in a worse position to pay down debt. As well, if you miss even one rent-to-own payment, your credit may not be repairable in time.

For income improvement, perhaps you'll get a promotion or find a better-paying job in the rental time-frame to help you qualify (talk to one of our expert brokers for more information). Again, it's a risk if you sign starting from a position where you can't yet qualify.

What happens if my partner wants out and I can't afford the payments on my own?

Missing payments during your rent-to-own period may result in a breach of both the rental and purchase-option agreements and you may lose the down payment amounts. Talk to one of our expert brokers for advice on how to improve your mortgage application.

Can I get my money back if I can't get approved by a lender?

How much of your down payment money you'll be able to get back (if any) will depend on your purchase-option agreement. Ask questions and have a lawyer review your contract to know your rights and risks.

What happens if home prices are higher when I go to buy?

Some rent-to-own contracts may allow the (lower) original purchase price to stand, which means you'll benefit from the increased home equity. If not, then you may need to come up with more down payment to address the price difference (if the contract allows it).

If home prices have gone down, can I pay the lower home price?

Some rent-to-own contracts may allow you to buy at a lower price if an appraisal shows the home's value has decreased. If not, you may have to buy the home at the originally agreed-upon price — which may interfere with your ability to get lender approval (a lender wants to ensure they'll recoup the home price if you default).

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