Can you really afford to rent to own?

What does rent to own mean?

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 the down payment)
Down payment saved after 3 years: $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:

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

Having trouble getting mortgage approval with a bank? We may be able to help with a short-term mortgage solution that allows you to refinance later for a better long-term rate.

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 18 years, with exceptional 5-star service that puts you first.