If you have bad credit, obtaining a mortgage can be challenging. But there’s another option worth exploring: rent-to-own housing. By renting a home in this fashion, you have the opportunity to work on repairing your credit while saving money towards purchasing the home in the future.
How Rent-to-Own Works
Rent-to-own housing involves renting a home for a set period of time, with the option to purchase it either before or when your lease expires. There are two types of rent-to-own contracts: lease-option and lease-purchase. In a lease option, you have the right to purchase the property you’re renting, while in a lease purchase, you’re obligated to buy it.
As a tenant in a rent-to-own agreement, you’ll be expected to pay rent on a monthly basis. Depending on the contract, a portion of your rent may go toward the home’s purchase price. You’ll also pay an option fee, which is non-refundable and provides you with the option to purchase the home in the future. The option fee can range from 1-7% of the home’s purchase price and is negotiable. In some cases, tenants in rent-to-own housing may also be responsible for maintenance and repairs.
The requirements for eligibility for rent-to-own homes vary by program. However, you’ll likely need to show proof of income and employment, and in some cases, have a certain amount of money in a savings account. Some programs also have minimum credit score requirements, though keep in mind that it’s typically easier to be approved for a rent-to-own with bad credit than it is to be approved for a mortgage.
Benefits of Rent to Own with Bad Credit
For homebuyers with bad credit, rent-to-own housing offers several notable benefits, such as:
- Option for bad credit: Rent to own provides an option for purchasing a home even if you have bad credit, as mortgage requirements are often much stricter.
- Credit repair opportunities: By renting a home in a rent-to-own agreement, you have time to work on repairing your credit before purchasing the home.
- Lower down payment or purchase price: If your option fee is applied to your down payment or purchase price while you’re renting, you may be able to lower the amount you need to save.
Making the decision to pursue rent-to-own housing can be difficult, especially if you have bad credit. Speaking with rent-to-own professionals can help you determine if this option is right for you.