Don’t Rent-To-Own Before Answering These 3 Questions

Buying a home through a rent-to-own agreement can be risky. If you can’t answer 'yes' to these questions, you might want to say 'no' to the whole thing.

If your credit score is too low for a mortgage from the Big Six and your down payment savings fall short of the minimums required by B lenders, rent-to-own might be your only option for buying a home.

A rent-to-own arrangement generally involves agreeing to pay above-market rent for a defined tenancy period. A portion of those payments is set aside to bolster both your down payment savings and your chances of getting a mortgage when it’s time to buy.

It sounds like a simple way out of a seemingly hopeless situation, but don’t let that ray of sunshine blind you to the risks. The potential downsides — losing your life savings, nuking your credit — aren’t any different than a typical home purchase. But when your finances are in recovery mode, the margin for error gets pretty thin.

If rent-to-own provides a way for you to afford a home, we want you to succeed. Answer ‘yes’ to these three questions and you could be on your way to making that happen.

1. Have you vetted your rent-to-own operator?

If you work your way down through the home financing industry — big banks at the top, individual private lenders and rent-to-own providers near the bottom — the amount of regulation you encounter tends to decreases further at every level.

That means the barrier to becoming a rent-to-own operator is pretty low. It’s critical to take the time to find one with a successful track record, and a reputation for integrity and fairness.

Brandy Mullen, founder of national rent-to-own company Sprout Properties, says a good place to start is by checking whether an operator is accredited by the Better Business Bureau (BBB).

“I see a lot of operators working without BBB accreditation, and that accreditation will allow tenants to go to BBB if they have an issue with the rent-to-own company,” Mullen says, adding that a listing on the BBB site is not the same as accreditation.

She says another way of vetting a rent-to-own provider is by asking for references. These can include past clients and mortgage brokers who can vouch for the company’s practices. A lack of positive references could indicate inexperience or a sketchy business model.

And if an operator has a negative or non-committal attitude about you getting independent legal advice regarding your contract, run.

2. Are steps being taken to ensure your success?

Marc Crossman, managing partner at Mortgage Alliance Lending Advisors in Alberta, says his experiences with rent-to-own typically involve helping buyers with agreements that have gone awry. He says to steer clear of any operator who makes the process seem easy.

“I think it has to be a really rigorous process for the client to go through,” Crossman says. “It depends on the buyer’s situation, but there’s a lot of setup required.”

Here are three areas where you’ll want your rent-to-own provider to go the extra mile.

The pre-approval process

Rent-to-own may be an unconventional way to buy a home, but it should still involve a pre-approval similar to what you’d go through when initiating a typical mortgage.

A careful pre-approval should factor in your income and debt service ratios to determine how much you’ll realistically be able to borrow at the end of your tenancy period. Without this step, you could be saving up for a purchase you have little chance of completing.

Guy Lew, senior underwriter and broker business development manager at HOS Financial Inc., a nationwide rent-to-own company, says buyers shouldn’t be approved for homes worth more than four-and-a-half times their annualized gross household income.

“So let’s say you have a young couple earning $100,000 a year. They’re qualified for a $450,000 house — not $600,000, not a million,” Lew says.

The pre-approval process also determines how much of a down payment you’ll need to qualify for a mortgage. This amount depends on the price of the home, but can also hinge on the buyer’s employment status. Lew says self-employed borrowers, for example, may have to put down as much as 20% of the purchase price.

Credit repair

Reputable rent-to-own operators put a comprehensive program in place to help improve your credit while you’re renting.

Lew says HOS’s Path to Homeownership program includes budgeting advice, education around establishing better credit and periodic credit score goals home buyers are expected to meet.

“We’re basically the voice over the shoulder making sure that the client doesn’t derail themselves and get themselves into further trouble,” he says.

Mullen recommends that buyers receive advice directly from mortgage professionals, including a full assessment of what they need to do to qualify for a mortgage and strategies for paying down debt that can lead to better credit outcomes.

“With a good rent-to-own company, they’re going to outline exactly what you need to do based on your unique individual circumstances,” she says.

Flexibility

The ideal rent-to-own operator will make at least some allowances for bumps in the road. You don’t want to be in business with someone who views a single late rent payment as a reason to terminate your agreement and seize your deposit.

According to Lew, some operators may provide alternative payment schedules to help buyers behind on their rent or extend the rental period if a buyer can’t secure financing by the agreed-upon date. They may even refund part of a deposit if the buyer exits the agreement for a legitimate reason.

These aren’t common scenarios, but they’re worth discussing with an operator if only to gauge their overall flexibility.

3. Are you ready to commit?

Successful rent-to-own arrangements require long-term commitment and possibly some tough sacrifices to keep your finances on track.

To qualify for a mortgage, you’ll have to adhere to your operator’s credit improvement plan and maintain a potentially tight budget for years.

“A good rent-to-own company is giving you all the tools to be successful, but at the end of the day, it’s truly up to you to stay on that path and prioritize [homeownership] as your number one,” Mullen says.

The challenges won’t end once you’ve gotten your mortgage, either.

Lew says that rent-to-own buyers sometimes revert back to the habits that damaged their credit in the first place, which can lead to defaults. Refinances and renewals can be particularly troublesome if your credit regresses or your home’s value decreases, so it’s crucial to maintain both your property and good financial habits.

You can start a rent-to-own transaction by setting high expectations for your operator, but you won’t successfully complete one without meeting the expectations you set for yourself.