Rent to Own Vs. Owner Finance
Rent-to-own and owner financing might sound like similar ways to purchase a home, but the implementation of each has its own pros and cons. Rent-to-own is a process where the tenant pays for the home or the home down payment with part of the rent money. With owner financing, the owner and tenants write a contract that allows the owner to act as the mortgage lender.
Other People Are Reading
-
Rent-to-Own Process
-
The rent-to-own process for homes is sometimes also known as a purchase option. The lease agreement between the landlord and prospective owners contains the standard agreement terms for a regular rental agreement, but additional clauses cover the rent-to-own clause. The tenant generally has a set amount of time to secure financing for the home, usually within several years, and a portion of the rent goes toward the home down payment or mortgage balance.
Owner Financing Process
-
Owner financing for homes is an alternative financing option for tenants who are unable to secure conventional financing for the property. The owner writes a mortgage contract for the tenants that details the loan amount, the interest percentage, the repayment term, monthly payments and other clauses found in a traditional mortgage contract. Instead of paying a lender, the tenants pay the owner the mortgage payments and legally own the home as though they had purchased it using a mortgage loan.
-
Advantages
-
The main advantages of both forms of alternative financing is that it offers a way for bad-credit borrowers and borrowers with hard-to-document income sources to purchase a home. The rent-to-own can buy time for borrowers to fix their credit in order to secure traditional financing. Owner financing allows the tenant to bypass the bank and deal directly with an individual.
Disadvantages
-
Rent-to-own offers are sometimes used for scams, where the tenants pay the extra rent on top of the normal rent payment, and are evicted without an option to recover the extra payments. Owner financing may only be for a short time, such as five years, and the tenant needs to refinance the loan once this period expires. The interest rate is also typically higher than a conventional mortgage loan.
-
