The Ins and Outs of Lease to Own Loans

New Survey Data from Embold Research, Sponsored by SoFi, Shows Federal Student Loan Borrower Confusion and Misconceptions Around Resumed Payments

Buying a home is an exciting milestone, but saving up enough money for a down payment can be challenging. If your credit or savings need some work, you may be wondering if lease to own loans are right for you.

Lease to own, also known as rent to own, allows you to rent a home for a period of time with the option to buy it later It can be a great way for first-time homebuyers to get their foot in the door However, these agreements also come with risks.

In this article, we’ll break down everything you need to know about lease to own loans. Here’s what we’ll cover:

What is a lease to own loan?
How does it work?
Pros and cons
Types of contracts
Qualifying for a mortgage
Finding a property
The homebuying process
Tips for success

Let’s get started!

What Is a Lease to Own Loan?

A lease to own loan, also called rent to own, is an agreement between a landlord/seller and a tenant/buyer. It allows the tenant to rent the property for a period of time, typically 1-3 years, with the option to purchase it at the end of the lease.

During the rental period, the tenant makes monthly lease payments. A portion of each payment goes toward a future down payment to buy the home. Essentially, lease to own allows renters to “test drive” a home before committing to purchase it.

These types of agreements appeal to renters who can’t yet qualify for a traditional mortgage The lease period gives them time to improve their credit, save more money, or increase their income to eventually buy the home

How Does Lease to Own Work?

Here are the basics of how a lease to own agreement works:

Find a lease to own property: Since these are private agreements between sellers and buyers, it can be tricky to find lease to own homes. Real estate agents, property databases, or for sale by owner listings are good places to look.
Sign a contract: The buyer and seller sign a Lease Purchase Agreement laying out the terms. This is more complex than a standard lease or purchase agreement.
Make a deposit: The tenant provides a deposit, usually around 2-7% of the home’s value. This secures their right to eventually buy the property.
Pay rent: The tenant starts making monthly lease payments. A portion of each payment is set aside in an account as a down payment.
Apply for a mortgage: Toward the end of the lease, the tenant applies for their own mortgage to purchase the home.
Buy the home: At closing, the accumulated down payment and the new mortgage are used to purchase the property.

The renter has the option to buy the home after successfully leasing it for the agreed upon period, usually 1-3 years. If they ultimately can’t qualify for a mortgage, the agreement ends and they lose any money paid toward the down payment.

The Pros and Cons

Rent to own agreements aren’t for everyone. Before signing on the dotted line, be sure to weigh these key pros and cons:

Pros

Time to improve your credit or save more money
Ability to “test drive” a home before buying
Automatic savings toward a future down payment
Less pressure than traditional homebuying process

Cons

Difficult to find lease to own properties
Risk of losing deposit and rent credits if you don’t purchase
Monthly payments are usually above fair market rent
Still need to qualify for a mortgage eventually

As you can see, lease to own offers some advantages but also comes with financial risks. Make sure you fully understand the agreement before moving forward.

Types of Lease to Own Contracts

The two main types of rent to own contracts are lease option and lease purchase agreements. Here’s how they compare:

Lease Option

Tenant pays a non-refundable option fee (2-7% of home value)
Tenant has choice to buy or walk away at end of lease
Purchase price negotiated upfront but can be renegotiated

Lease Purchase

No upfront option fee
Tenant is obligated to purchase the home at end of lease
Purchase price is fixed when contract is signed

With a lease option, you reserve the right to buy but aren’t required to. Lease purchase requires the tenant to purchase the property at the end of the term.

Qualifying for a Mortgage

The end goal of a lease to own agreement is for the tenant to eventually buy the property. This means that during or before the lease term ends, the renter needs to apply and qualify for their own mortgage.

Lenders generally look for the following when reviewing a mortgage application:

Down payment – Expect to provide 15-20% of the purchase price
Credit score – Aim for at least a 620 FICO score
Debt-to-income ratio – Should be below 50%
Stable income – At least two years of steady employment recommended

Work on improving these areas during your lease to boost your chances of mortgage approval when the time comes. Connecting with a lender early in the process is wise.

Finding a Lease to Own Property

Finding homes open to a lease to own arrangement can be challenging. Here are some tips for locating available properties:

Contact real estate agents who specialize in lease option agreements
Search property databases like HomeFinder.com and RenttoOwnLabs.com
Look for “lease to own” listings with major homebuilders
Check for “For Sale by Owner” signs where the owner is motivated to sell
Ask your current landlord if they’d be open to a lease to own agreement
Consider lease to own programs like Home Partners of America

Cast a wide net and be diligent in your search. It may take some time to find the right lease to own opportunity.

Walking Through the Homebuying Process

Ready to move forward with a lease to own? Here are the usual steps involved:

Find a property – Research lease to own listings until you locate a suitable home.
Make an offer – Present your offer and proposed lease to own terms to the seller.
Get approved – The seller accepts your offer after reviewing your application.
Sign the contract – Carefully review and sign the Lease Purchase Agreement.
Pay your deposit – Provide the agreed upon upfront deposit, typically 2-7% of the home’s price.
Move in – Do a walk through, get the keys, and move into your new rental home!
Make rent payments – Pay rent each month with a portion going toward your future down payment.
Apply for financing – Research lenders and apply for a mortgage around 6-12 months before your lease ends.
Close on the sale – The buying process is complete once you close and obtain the title!

It’s smart to consult with a real estate attorney before entering into a lease to own contract. An experienced professional can help you avoid potential pitfalls.

Tips for Success with Lease to Own

If you do opt for a lease to own agreement, here are some tips that can help set you up for success:

Vet the seller carefully to avoid scams
Work to actively improve your credit during the lease
Make payments on time every month
Start shopping lenders before your lease ends
Only lease a home you’re confident you want to buy
Build up emergency savings to cover unexpected costs
Research down payment assistance programs in your state
Hire a real estate attorney to review the contract
Consider getting a home inspection before signing

With proper planning, diligence, and patience, a lease to own loan can serve as a springboard to achieving your ultimate dream of homeownership.

The Bottom Line

Lease to own agreements allow hopeful homebuyers to get their foot in the door. But they also come with financial risks to weigh.

If you go this less conventional route, make sure you fully understand the terms, keep up with payments, and work to eventually qualify for a traditional mortgage. With careful planning, lease to own can be a viable pathway to buying your first home.

Understanding the current state of federal student loan repayment

In October 2023, federal student loan borrowers received their first bill in nearly three-and-a-half-years, following the end of the student loan moratorium. Throughout the payment pause, significant dialogue and updates to student loan-related policy took place, including various loan forgiveness initiatives, new income-driven repayment plans, and forbearance extensions.

To gain a deeper understanding of the current landscape for student loan borrowers following the resumption of their bills, Embold Research conducted a study, sponsored by SoFi, that surveyed 1,006 federal student loan borrowers nationwide from February 29 – March 11, 2024. Notably, the research was completed before the Biden Administration proposed a new set of rules aimed at providing student loan debt relief for certain borrower groups on April 16, 2024.

Key insights from the survey showed the following:

• Nearly 40% of federal student loan borrowers have not resumed payments since the end of the moratorium in October 2023. Borrowers report a variety of challenges to repayment including: financial strain, confusion over government policy (especially, related to broad-based loan forgiveness), the need to adjust their budgets, and feelings of anxiety or stress.

• Nearly half of borrowers report that they have changed their plans for repayment due to public discourse on loan forgiveness.

• A majority of borrowers believe that the federal government has not been effective in communicating about the end of the moratorium and their repayment options.

• This belief is particularly pronounced among borrowers without a Bachelor’s degree and those from lower-income households. These borrowers are less likely to feel they understand the details associated with their loans and are much less likely to be aware of alternative repayment programs, such as income-driven repayment (IDR) plans, intended to help those from lower-income households.

What does the data tell us?

First and foremost, borrowers are facing numerous challenges in paying their loans, with some not submitting a payment at all.

Importantly, the data shows that public discourse surrounding student loans and the guidance and communication borrowers receive are leaving them confused and influencing their payment trajectories. This heightens the already stressful burden of student debt, leaving some borrowers without the information they need to make informed decisions or not take any actions to pay down debt.

Take Out A Loan To Pay For My Rent-To-Own House?

FAQ

What is the difference between lease to own and a mortgage?

The big difference is that when you get a mortgage to buy a house, the title transfers to you, and the lender takes a lien against the property. If you later default on your mortgage payments, the lender can foreclose on your property. However, the title stays with the seller when you rent to own.

Is Lease to Own legit?

Not all rent-to-own agreements are ethical and some are downright illegal. First, carefully read any contract you are given to make sure that you aren’t paying excessive fees and overly high rates.

Does lease to own affect credit?

Rent-to-own agreements are not reported to credit bureaus so your credit score is unaffected. Unless … if your expressed hope is to use the rent-to-own agreement period to build your credit score through on-time payments, you can ask the homeowner to report your payments to the credit bureau.

Is rent-to-own legal in Utah?

A Utah rent-to-own lease agreement is a standard lease that includes an option for the tenant to buy the property. The option is usually negotiated prior to signing a lease which allows the tenant to obtain financing.

Should you buy a home with a lease?

Just make sure you choose a lease-option agreement: You’re legally on the hook to buy the home with a lease-purchase agreement. You may lock in a better price on the home. If values are on the rise in your area, a rent-to-own contract makes it possible to lock in a price so you’re not at the mercy of the market when your lease is up.

How does a rent to own home or lease work?

There are two main types of rent-to-own agreements: lease option and lease purchase .In a lease option, the buyer has the option (but not the obligation) to purchase the home later .In a lease purchase,

How does a lease option work?

In a lease option, the renter and seller agree on the purchase price and length of the lease. The renter pays an upfront fee, called an option fee, that secures their right to buy the home later. The renter pays rent each month plus an additional amount that the seller sets aside for the future down payment.

How much does a lease option cost?

A lease option agreement requires you to pay the homeowner an option fee when you sign. The fee is typically 2% – 7% of the home’s value. The rent credits you save during the lease term go toward your down payment if you buy the home. In most cases, your option fee will also reduce the property’s purchase price.