Rent-to-Own and Mortgages: What You Need to Know

Categorized as Rent To Own Homes

Buying a house is sometimes difficult to acquire because of the process and finances it entails. You may need to get a mortgage to buy a home, and this would be approved based on your credit score.

For getting a mortgage, there is also a need to have money that will be used as a down payment for the home. Getting the mortgage application rejected has left many with the option of renting out the house instead of buying it.

Renting a house is usually the cheapest option towards owning a home while you save up to buy your own house. However, you can get the option of both renting and buying a house when you make use of the rent-to-own option. Let’s find out what rent to own means and how it works to get you to own your home. 

What Is Rent-to-Own?

In a rent-to-own agreement, you, as the buyer, can rent out the home while you pay over a few years before fully acquiring the home. In rent-to-own, you pay more than the actual rental fee and the extra money serves as a down payment towards acquiring the home at the end of the agreement period.

One of the limitations that are associated with a rent-to-own agreement is that, if you, as the buyer, do not complete the payment and decide not to buy the house at the end of the lease, all the extra payments made would be lost.

Types of Rent-to-Own Agreement

There are two types of rent-to-own agreements, and both of them are focused on allowing you to buy out the house at the end of the lease period. Let’s discuss these two rent-to-own types of agreements below: 

Lease-Option Agreement

In this type of rent-to-own agreement, you, as the buyer, would have to pay a certain fee as agreed with the landlord.

This payment is considered a down payment for the purchase of the home and is paid to the landlord or homeowner.

This lease-option agreement allows you to discuss with the homeowner the price of the home when the lease expires. In a case where you decide not to buy the home when the lease expires, you would need to forfeit the extra payments made as a down payment for the home.

Lease-Purchase Agreement

The lease-purchase agreement works similarly to the lease option agreement, but the difference here is that you would need to purchase the home at the end of the lease.

Before going into this form of agreement, you and the seller or homeowner would have agreed on a price for the purchase before signing the contract. There can also be an appraisal done on the home to ascertain its worth before agreeing to the purchase price.

This option of a rent-to-own agreement gives you an idea of how much you would have to pay for the house when the lease expires.

In a case where you decide not to buy the house after the lease expires, you will forfeit all the extra money paid as a down payment, and the homeowner can also sue you for breach of the agreement.

The Nonrefundable Upfront Payment

Before signing any of the types of rent-to-own agreements, you are required to pay the homeowner or seller a particular fee, which is nonrefundable.

This payment is referred to as the option fee or money. The option fee varies and depends on the landlord, but it ranges between 1% and 5% of the agreed home purchase price. 

Rent-to-Own Pros and Cons For Buyers

As you decide to make use of the option of a rent-to-own agreement to become a homeowner in the future, there is a need to weigh the pros and cons as you make your decision.


  • You don’t have to wait for a mortgage loan approval to own a home. The rent-to-own agreement allows you to prepare and boost your credit over time until you qualify for a mortgage loan.
  • When you make use of the lease-purchase option of the rent-to-own agreement, you get the chance to buy the home at the agreed price, even when there is a current rise in the price of purchasing such homes.
  • Rent to own allows buyers to live in the homes they want to purchase while making steady payments toward the purchase of those homes in the future.


  • One of the pitfalls of the rent-to-own agreement is that, when the lease expires and you choose not to buy the home, you stand to lose all the extra payments and the option fee made towards purchasing the home.
  • In an event where the sale price of the home has been reduced, you would have to still pay the initial price agreed upon with the seller, even if the house is now worth less than the agreed purchase price. Also, if the purchase price increases while you are still in agreement, you don’t have to pay the extra cost.
  • When a late payment is recorded, you may stand the chance of losing the option to purchase the home even at the end of the lease.

What is a traditional mortgage?

A traditional mortgage is an agreement made by the borrower and the lender on the right to own a property by getting a loan that needs to be paid back subsequently with interest.

In an event whereby the borrower cannot completely repay the loan, the lender has the right to take possession of the property. The repayment of the mortgage loan is based on the agreement of the two parties involved, that is, the lender and borrower and it can be a monthly repayment.

Pros and Cons of mortgage

Getting to buy a home of your own is a big achievement but sometimes getting the funds to buy can be quite hard to come by. If you intend to take out a mortgage loan here are some of the pros and cons to consider if it is the best option for you.


  • It is cost-effective

Since you can spread the payments of the mortgage over while as agreed with your lender, it makes purchasing a house very affordable and cost-effective once you qualify for a mortgage. You can also be able to get the ideal type of mortgage which is suitable for your needs making it easier to repay.

  • It is easy to repay

Mortgage loans are easy to repay because of the long duration of time it allows. The interest rates are usually lower than that of the other types of loans and it gives borrowers ample time to pay back as it can be paid monthly.

  • The mortgage makes it easy to buy

A mortgage makes it very easy to purchase your own home when you qualify for it. The hardest part in getting a mortgage is usually the approval process and documentation. After which it becomes easy to buy a home of your choice while paying back gradually.


  • Excessive debts

Taking out a mortgage allows you to be in debt for quite a long time which can span over several years. In most cases also, you may have to pay back more than you initially borrowed at the end of the repayment period.

  • Repossession

If there is a default in the repayment plan by the borrower, the right to the property can be taken away by the lender. In this way, you would lose out on all previous payments and also on the property.

The differences between rent to own and mortgages

Rent to own and mortgage are sometimes confused together and seen as an easier means of purchasing a home. However, these two have their distinct advantages which set them apart from each other. Here are some of the differences to note.

  • A mortgage is a loan taken out to purchase a home outrightly and it is repaid over an agreed period while rent to own is a means used to purchase a home by paying up little amounts over some time before buying the home.
  • Rent to own allows the buyer to live in the property as he or she makes monthly payments towards buying the home at the end of the lease while the mortgage loan needs to be first of all approved and taken out before the borrower can live in the property.
  • For the rent to own process, there is no need to have a good credit score as it is not a criterion for renting a property but for the mortgage, a good credit score would hasten your approval process and also allow you to get loans to buy the property as it shows you are trustworthy

FAQs About Rent-to-Own & Mortgages

  • Can I do a rent-to-own if I still have a mortgage?

As a homeowner or landlord, you can offer a rent-to-own option to buyers or tenants. However, the mortgage agreement would remain in your name, and the payments processed by you until the agreed period when the homeownership has been transferred. 

  • How easy is it to get approved for a mortgage?

It is somewhat easy to get approved for a mortgage, provided all your information and assets are in good condition. To get approved for a mortgage, you would need to consider your assets, credit score, income, and debts. Even if there is a little problem in one of these categories, you can still have a high chance of getting approved for a mortgage loan. 

  • Does renting to own appliances build credit scores?

There is an opportunity that allows buyers to make use of rent-to-own agreements to purchase household appliances, furniture, and cars. Just as it is with the rent-to-own agreement when buying a house, when buying appliances and cars with the rent-to-own agreement, you would need to pay a monthly fee for some time. It is worthwhile to note that the rent-to-own agreement does not improve or build your credit score, and it usually does not appear on your credit report.


A rent-to-own agreement makes it easy for prospective homeowners to buy their homes even when they don’t have a good credit score or the finances. However, before making a move with the agreement, it is necessary to compare the risks and advantages before signing the rent-to-own agreement. 

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