How Rent to Own Works

• In a rent-to-own agreement, a landlord, who is also the property owner and prospective seller, offers his property for sale through a rent-to-own contract. The terms of the contract can vary, but typically center around a combination of a rental agreement and an option to purchase. The prospective buyer and tenant agrees to rent a home for a certain rent, often a bit higher than market rate. He also agrees to pay the owner-landlord a fee in exchange for obtaining an option to purchase the property. Some agreements lock in the price; others simply provide for a methodology by which the price is determined at a later date. There is usually a strict time limit on the option, often a year to several years in the future. The tenant has until the end of the option period to purchase the property.
  
  

Qualifications Vary

• The landlord-owner can determine any qualifications he deems important. He might include a standard rental application for the applicant to fill out, which will tell him what the tenant's credit and income are like. He might set a minimum standard for credit and income that will match the qualifications a person would need to obtain a mortgage, but he might also set the standard lower --- at the level typically required for a rental tenant.
  
  

Identifying Qualifications Required for a Mortgage

• The standards used by a landlord-owner to qualify tenants for a rent-to-own contract might be far different than the standards a bank uses to qualify a borrower for a mortgage. This is important because before the purchase option expires the tenant will have to qualify for a mortgage to be able to purchase the property. It is not the landlord's responsibility to give or help the tenant get a loan. To obtain a mortgage you will need a down payment of between 3 and 20 percent, a good credit score, a monthly income of at least three times the prospective mortgage payment and limited credit card and other revolving debt.
  
  

If It Looks Too Good To Be True

• If the qualification standards to sign a rent-to-own contract are notably low, the reason might be that the landlord wants to collect rent that is above market-rate and an option fee but really doesn't want to sell the building. He may, in fact, even target prospective tenants who he can see will not be able to qualify for a mortgage. Once the option period expires he can evict the tenant and start the rent-to-own process all over again. If you are thinking about signing a rent-to-own contract, visit a mortgage loan officer or mortgage broker to understand whether you can now or in the future qualify for a mortgage large enough to buy the house you will initially rent. If not, reconsider your options. You may be better off continuing to rent while you improve your credit and save for a down payment.