How is a Rent to Own Mortgage structured?
A property owner will rent out their home to a potential home buyer with a specific contract that indicates the tenant’s intent to purchase the property at the end of the period, this can be anywhere between 3 to 5 years. For the tenant to still be viable to purchase the property at the end of the contract, they must adhere to any and all conditions agreed to in the Rent to Own agreement. The two parties will then decide on the rental amount and the amount which will go towards the down payment. Usually 75% of the monthly payments go towards rent, while 25% go towards the down payment.
Some Rent to Own Mortgages are built with an ‘Option Consideration’. In this case, the potential homebuyer will pay between 2% to 5% of the home’s final asking price at the beginning of their rental agreement. If the tenant no longer wishes to purchase the property, they are able to walk away from the agreement at the end of their lease, forfeiting the original option funds.
Example of How Rent to Own Mortgage Works
The following is an example of how a Rent to Own Mortgage agreement can be structured:
A home buyer enters a rent to own agreement for a 3 year contract. The renter will pay $1000 a month for rent and an additional $500 for the future down payment. Here is the breakdown of the transaction:
- The price of the home is agreed upon at the beginning of the agreement at $450,000
- The upfront deposit is $11,250 (2.5%)
- The mortgage at the end of the agreement would be $438,750
- The monthly rent is $1000
- The monthly contribution to the down payment is $500
- After 3 years the total from the monthly down payment advances would be $18,000
- The remaining mortgage at the end of the rental period would then be $420,750