RENT TO OWN VS OWNER FINANCING: UNDERSTANDING THE DIFFERENCE
What Is Rent to Own?
How does rent to own work? With rent to own real estate, the buyer or renter has the option of buying the home at some point in time in the future. Until then, the landlord is the real owner of the home and is responsible for mortgage payments on the property. Moreover, the owner’s name is on the deed. The buyer, on the other hand, can purchase the property but does not have the obligation to do so. In addition, the deal can potentially fall through without the buyer ever owning the property in the first place.
With rent to own homes, the purchase is classified as a lease-purchase. Typically, the rent to home contract includes a clause that specifies the following terms:
- The current sale price of the property
- The amount of rent that goes toward the sale price each month
- The amount of time it can be rented before it is bought. This gives the tenant more time to secure conventional financing to purchase the home.
What Is Owner Financing?
So, now that we have defined rent to own, you may be wondering how does owner financing work? With this financing option, property ownership transfers from the owner to the buyer. In this case, the buyer becomes the new owner upon closing. In an owner financing contract, the owner acts like a bank by offering to finance the purchase.
Remember that in the case of a rent to own transaction, the buyer makes rent payments that may or may not apply to a purchase in the end. In contrast, with owner financing homes, the buyer pays off the loan after the purchase actually happens. This option is especially great for people who have bad credit or not enough credit to qualify for a conventional mortgage.
Like a rent to own option, owner financing typically requires a down payment that is usually lower than what mortgage companies require. The owner and buyer sign a mortgage agreement that includes the term of the loan, interest rate, monthly payments, and any additional clauses.