How Does A Rent-To-Own Work?
The rent-to-own is as how it sounds. A tenant (the future home buyer) leases a home with the intention to buy the home at a pre-determined price some point in the future.
Rent-To-Own is a program that allows you to buy a home today without having to meet the typical qualifications required by banks. This program is specifically designed to assist people experiencing difficulty in obtaining conventional financing.
In our rent-to-own program, your monthly payments are all inclusive: property taxes, building insurance, condo fees (if applicable), mortgage payments and lease option credits. The lease option credits are credited toward your down payment in addition to your initial down payment when you exercise your option to purchase the property. The lease option credit amount varies depending on the property you select and the initial down payment you have.
For example, a $300,000 single family home (3 beds, 2 baths, 2 story, good neighbourhood) would leases for approx. $1800 per month and $300 of that $1800 would go towards the purchase of the home when they buy at the end of the 36 month lease. After the lease term, the Tenant-Buyer will have $10,800 ($300 times 36 months) towards the purchase of the property.
| Purchase Price of New Home | $300,000 |
| Option fee paid at start of lease | $10,000 |
| Monthly credits towards down payment | $10,800 ($300/mth for 36 months) |
| Total Down Payment Saved (Option Fee paid + Monthly Credits) | $20,800 |
| Mortgage required at end of lease | $279,200 |
At the end of the lease term, the Tenant-Buyer has saved $20800 that will go towards their down payment and closing cost when they buy the property. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it’s like forced savings) instead of having to put aside $500, $600, $700 per month into a (low interest) savings account.
Why Would a Renter Do This?
So, why would a renter choose to do this option rather than just saving and buying later or even buying now? Several reasons:
1. They may not have a large enough down payment today to qualify for the mortgage.
2. Their credit may be damaged and so they need some time to correct it to ensure they can get the best rates and terms available (why pay 10% interest with bad credit today when you can build up down payment credits in a Rent-To-Own, improve your credit and obtain 5% interest tomorrow?)
3. They want to progress into the home ownership market today because they think houses will be too expensive for them a year or two from now but again, they may not quite have the down payment, credit, or even income to obtain ideal financing today.
4. They may want to “test” being a homeowner. Perhaps the renter has never bought their own home and doesn’t know how much work/costs/time being a homeowner can consume versus being a renter. The Rent-To-Own strategy gives them a feel for being a homeowner, without having to come up with a ton of cash ( for the down payment and closing costs) to buy today.
Who Makes A Good Rent to Own Candidate?
So, why would a renter choose to do this option rather than just saving and buying later or even buying now? Several reasons:
Bruised or No Credit – If a prospective tenant-buyer has been turned down by a bank because of credit problems, a lease-to-own may work for them. However, it is important for the tenant-buyer to have a plan to get their credit in better shape during their rental term (so that they will qualify for financing
when they purchase the home). We can help them with that by working with our mortgage or credit specialist.
New to Canada – Another good lease-to-own candidate is a tenant-buyer who is new to Canada. Often when new immigrants come to Canada qualifying for a mortgage can be challenging. A Rent-To-Own allows the new Canadian to get a foot-in-the-door of a property earlier than would otherwise be possible.
Recently Self-Employed – Buyers who have been self-employed for less than 2 years will find it difficult to qualify for a mortgage at a conventional bank. Since most lenders require a minimum 2 year history on your self-employment income, a Rent-To-Own can give the self-employed buyer a chance to get their business going while still working towards home ownership.
Good Employment / Income History – A tenant-buyer or rent-to-own candidate should be able to prove they can pay their monthly rent to the seller on a consistent basis. Because their credit may not be strong (or established), the Rent-To-Own candidate should be able to show or verify to the Seller that their income can support the monthly payments. And, the tenant-buyer should only pay up to 40% of their gross income in monthly rent payments. If the rent adds up to more than 40% of their gross (before tax) income, then the prospective property is likely too expensive for the tenant-buyer and they should find
something more affordable.