Options for a Rent-to-own Agreement

Rent-to-own Agreement Basics

A contract is drafted between a potential home buyer and a seller to have monthly rental payments count toward the principle of the home's sale price. The payments count toward the purchase price of the home only if the buyer opts to purchase it at the end of the lease agreement. If the buyer chooses not to purchase the home, the seller has the option to keep all rental payments and evict the buyer. A purchase option fee is typically included as part of the rent-to-own agreement and is paid by the buyer.

A down payment is provided to the seller along with monthly lease payments until the buyer finds an acceptable form of conventional financing. The lease agreement may last anywhere from one to five years and mortgage financing may eventually be provided by the seller. If conventional financing is not obtained by the end of the lease agreement, the seller has the right to evict the buyer from the property and keep all payments. The seller will typically require the buyer to pay for property insurance, taxes and homeowners association fees for the duration of the agreement.

In this type of rent-to-own agreement, the buyer makes the seller's monthly mortgage payments. The title to the home is usually not transferred to the buyer until the last payment is made. The title transfer may occur up to 30 years later if the seller's mortgage is relatively new. Late payments from the buyer typically give the seller the right to evict on the basis of non-payment for rent. The buyer retains the right to keep all payments, as well as the property.

Wrap-around financing involves the buyer making payments to the seller that may exceed his or her monthly mortgage payment. The seller offers the buyer a new mortgage that includes the original mortgage amount. The seller continues to make payments to his or her lender and keeps any excess as profit. If the seller fails to make the mortgage payment to the lender, the buyer retains no rights to the property and might face eviction in the event of a bank foreclosure.