3 Pitfalls to Avoid When You Buy a Rent-to-Own Home

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  • A rent-to-own setup may be a good bet if you want to purchase a home but can't yet get a mortgage.
  • These arrangements can come with their share of drawbacks.
  • You might face high rent payments, putting down a deposit, and needing to make your own home repairs.

Steer clear of these if you're pursuing one of these arrangements.

Most people who want to purchase a home can't do so outright. That's where mortgages come in.

But what if you can't qualify for a mortgage? It may be that your credit score is in poor shape, and that you need to work on building it to qualify for a home loan. Or, it could be that you don't have funds saved up for a down payment on a home. Usually, you'll need to put some amount of money down at closing, unless you happen to qualify for a mortgage that doesn't require a down payment, like a VA loan.

If you want to own a home but can't get a mortgage right away, you may be interested in going the rent-to-own route. With a rent-to-own contract, you sign an agreement that has you renting a home from its owner with the understanding that you'll be purchasing that home after a period of time, and that a portion of your rent payments will go toward your future home purchase.

It's a great idea in theory. But if you're going to buy a rent-to-own home, try to steer clear of these pitfalls.

1. Signing up for rent payments that are unreasonably high

You'll generally spend more on rent for a rent-to-own home than a standard rental. The reason? A portion of your rent payments will be set aside and allocated to the purchase of that home down the line. But if you're not careful, you could end up paying a lot more rent. And you won't necessarily get to apply all of that extra money toward your home purchase.

Let's say you're looking at a three-bedroom home. The average home that size in your neighborhood might cost $2,000 a month to rent. But under a rent-to-own arrangement, you might end up paying $2,500 a month. And worse yet, you're not guaranteed to get that extra $500 credited toward your future home purchase. Rather, you may only get to allocate a portion of that.

In fact, you'll often hear that a rent-to-own arrangement will effectively force you to save money for a home purchase. But in this scenario, you could potentially find a rental for $2,000 a month and then save the full extra $500 a month yourself rather than pay it in rent.

2. Getting stuck with a large deposit

When you buy a rent-to-own home, you're generally required to put down a deposit. But you don't want to get stuck with a deposit that's too large. In that case, you might as well see if your deposit is robust enough to qualify for a low down payment mortgage.

3. Forgetting about repairs

With a standard rental agreement, your landlord is on the hook for making repairs while you're renting their home. With a rent-to-own arrangement, you're generally the one responsible for making repairs. And that's an expense you'll need to work into your budget. It's also something you'll need to make time for. If you work a full-time schedule and have lots of commitments, you may find that you don't have the ability to perform home repairs, and that could leave you stuck outsourcing them -- and paying a premium for it.

While a rent-to-own arrangement could work out well for you, it's important to recognize the pitfalls that tend to trip buyers up. In fact, before you sign one of these contracts, spend some time reading up on the drawbacks so you don't regret your decision after the fact.

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