Rent-to-Own vs Seller Financing
July 17, 2020
While rent-to-own and seller financing may sound similar at first, they are two very different paths to homeownership. Let’s discuss the differences and pros and cons of each, so you can make a decision that best suits your needs.
What is Rent-to-Own
Let’s start by discussing what a rent-to-own contract is. When renting-to-own the buyer makes an agreement with the seller to rent the home until they can purchase the home through obtaining a traditional loan. During the rental period, a portion of the rent will be applied to the price of the home, this way when you are ready to purchase the home through a more traditional mortgage type, the type of mortgage is much lower as you’ve already invested a significant amount into the home.
What is Seller Financing?
Seller financing is when the seller finances the mortgage of the home, similar to how a bank loan would work, but it is coming from the seller directly. Upon borrowing the money from the seller, the house would be purchased as normal. After closing, the current owner will transfer the home deed to the new owner. This makes both options appealing to buyers who may not have perfect credit and would likely be turned down by a bank for a loan.
Which is better for you?
The type of home purchase that is best will depend on your current financial situation and goals. With seller financing, you may not need perfect credit like you would from a bank, but the seller would still want to see a decent history of on-time payments before lending you cash. Likewise, if you are unable to meet the obligation of the loan, this will negatively impact your credit score.
Rent-to-Own can be a little more lenient if this is your first home and you’re trying to get used to what homeownership will look like prior to diving in. You get to live in the home as if it were yours, put money toward an eventual purchase, but are still considered a “renter” until the option to buy the home is reached. This gives you time to see if the home is a good fit, repair your credit, save money and more.
There are pros and cons to each, so think over the decision carefully before jumping in. If you decide that rent-to-own is a good option, be sure to check out our up-to-date list of rent-to-own homes near you. Our listings contain direct contact details for the owners, so you can reach out to them with questions, or to start negotiating right away.