Dave Ramsey Said This Is a 'Seriously Dumb' Way to Get Into a House. Is He Right?

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KEY POINTS

  • Many people want to buy a house as soon as possible, and using a rent-to-own arrangement could be one way to do that.
  • Finance expert Dave Ramsey has warned against using rent-to-own to purchase your place.
  • You may end up paying more in rent for one of these agreements, but then be unable to complete the home purchase.

If you are eager to buy a home as soon as possible, you may be interested in exploring all options that could get you into a property sooner. That's especially true if you don't have the down payment or the credentials to qualify for a mortgage right now.

If that sounds like your situation, a rent-to-own arrangement may seem attractive. When you buy a house with a rent-to-own deal, you typically agree to rent a property for more than the current market rate in exchange for the option to buy it at some set price later on. The money you're paying in rent each month helps you build equity in the home that can serve as your down payment. Then, you eventually take out a mortgage to buy the house once you have some home equity in it.

While this may sound like a good deal, finance expert Dave Ramsey is not a fan of rent-to-own arrangements. Here's what he had to say, along with some thoughts on whether he's right.

Ramsey's problem with rent-to-own

Ramsey has referred to rent-to-own arrangements as a "bad deal," for one key reason. His big issue is you'll get stuck paying higher rent payments under the arrangement but you may not be able to follow through on the home purchase. You could end up losing a lot of money if this happens.

"If you later decide you don't want to buy the house or something happens to break your contract (like you don't get approved for the mortgage), you won't get all those extra payments back," Ramsey warned. "They'll have been a waste!"

Ramsey also said there's another big downside to rent-to-own contracts. Often, the contracts are structured so you are required to pay for repairs to the property even when you are a renter. Normally, a landlord would cover these costs, which can be expensive. But if you get stuck paying them, you're going to be spending a lot of money on a house that you don't yet own and may never end up being the owner of. This is money that would be lost as well.

Is Ramsey right?

Ramsey is absolutely right that rent-to-own is not a good way to buy a house. The simple reason for that is rent-to-own contracts are almost always drafted in a way that heavily favors the home's current owner while disadvantaging the renter (who is usually just desperate to buy a house and feels as if they don't have other options).

Many rent-to-own contracts have clauses that put you at serious risk of losing money, such as a clause that says you lose the chance to buy the property if you miss a payment or are late with it. This could mean losing all the money you've already put in. Plus, in many cases, very little of your rent actually goes toward earning equity in your house, and you could end up overpaying for the house, depending on the valuation set.

Rather than taking on the huge risks of rent-to-own, you're far better off listening to Ramsey's warning and steering clear. Instead, continue renting normally while saving up the cash you need to get a mortgage loan the traditional way.

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