While Canadian real estate market prices have cooled since the pandemic-era housing boom, they remain higher than before COVID-19. As a result of the current landscape, households are trying to find any option to achieve the dream of homeownership.

One of these alternatives that is gaining momentum across the national market is rent-to-own.

But what is it exactly, and how can families potentially utilize this method to buy a home?

Rent-to-Own: A Primer

Rent-to-own, also commonly referred to as lease-to-own, refers to a lease agreement where you rent a home for a specific period of time with the option to buy it at the end of the lease. The concept behind this arrangement is that a portion of the monthly rental payments is allocated toward the down payment for that specific residential property. Once the lease ends, the occupant who is renting can buy the property by obtaining a mortgage after having accumulated the down payment through the rental payments.

Most rent-to-own homes have an average contract length of three to five years. If the lease expires and you do not exercise your option to purchase, you will lose the ability to acquire the property. The purchase price can be negotiated in advance and is generally based on the property’s current value.

Indeed, rent-to-own homeownership programs have become increasingly common in Canada.

For many families forced to sit on the sidelines after all these years, it is a reliable alternative path to homeownership. People can immediately move into the home they desire to buy and use part of their rent toward a future down payment. Another benefit is that individuals can lock in a purchase price and benefit if the property’s value appreciates once the lease period expires and they purchase it.

What You Need to Know About Rent-to-Own Homes

To qualify for a rent-to-own home, occupants must possess good credit, a steady income, and enough funds for the initial deposit. This deposit serves as a security for the home, be it a detached property or a condominium suite. If these conditions are met, one can enter into a lease agreement for three to five years with the option to buy the property at a predetermined price once the period ends.

Monthly rental payments for rent-to-own homes are typically higher than the market rent, but that is primarily because a portion of this money is being set aside as your down payment. Remember, rent-to-own is an excellent option for those who can’t afford to make a sizeable down payment.

Moreover, it is also a feasible strategy for people not qualifying for a traditional mortgage. This homeownership strategy allows you to move into your home with little or no down payment and gradually build your equity through rent payments.

That said, a few things need to be kept in mind during the entire process.

First, households choosing this option should budget for paying higher rent than the market rate. This means that over the contract term, you may end up doling out tens of thousands more in rent.

Second, when the lease ends and you decide to proceed with the purchase, there is no guarantee that you will qualify for the mortgage. If you do not get approved for a mortgage, all that extra money you pay monthly will be lost.

Third, rent-to-own leasing contracts can also be quite complicated. They tend to maintain stringent terms typically in the seller’s favour.

To ensure you understand what you are getting into, it is recommended that you partner with a trusted real estate agent and also obtain the services of an attorney with expertise in real estate so that he or she can review the terms and help you avoid any problems in the future.

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Of course, it is worth pointing out that a rent-to-own platform may not be helpful for people who qualify for a traditional mortgage or have the funds to make a down payment.

A Few Reminders

Here are some vital steps involved in the rent-to-own process:

  • Find a property that is listed as a rent-to-own.
  • Review all critical details, including the monthly rent, the purchase price at the end of the leasing agreement, the required down payment, maintenance responsibilities, and penalties.
  • Ensure you meet the basic eligibility criteria, including a steady income, employment, a good credit score, and an exceptional rental history.
  • Sign an option-to-purchase agreement that gives you the right to buy the property after a specific time frame at a predetermined price.
  • Make monthly rental payments as per the terms of the agreement.
  • Exercise your option to purchase the home before the deadline.

A Look at the Brass Tacks of Rent-to-Own

During the process of signing the option-to-purchase agreement, you will have to pay an upfront fee, which is referred to as an option fee. This is the fee that gives you the option to purchase the home once the lease period ends. Additionally, this is a non-refundable amount; if you cannot or do not want to purchase the home at the end of the agreement, the funds will be lost.

The fee can range between one per cent and five per cent of the purchase price. You can consider this amount a non-refundable deposit for your future home. It is important to note that the lower the option fee, the higher the monthly rental payments will be. Therefore, those who pay a larger amount upfront can benefit from lower monthly payments.

Overall, rent-to-own is a valuable strategy for people wishing to own a home without conventional financing options.

You can move into your dream home even if you do not meet the requirements of traditional lenders. The day you move in is the day you start building your equity. This strategy is most feasible for people new to Canada, those who are self-employed, or those who cannot qualify for a traditional mortgage.

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