What Types of Buyers Choose the Rent-to-Own Option?

Rent-to-own options are ideal for borrowers who have the income to support a large monthly payment but lack the down payment needed to purchase a home. This describes a large number of potential borrowers who are looking for their first home. Rent-to-own options also become popular during a recession when many home owners lose equity on their property sales. Rent-to-own is a life safer for these groups of people.

First-Time Home Buyers

Many first time home buyers are young in their careers. They may earn a healthy salary, especially if they do not yet have expenses associated with children. These first-timers are often the cream of the crop for lenders. They are less likely to suffer from layoffs or joblessness than older individuals at the same salary level. The main problem, though, is may of them have not been able to save the tens of thousands of dollars needed for a down payment. Lenders will be unwilling to extend no down payment loans to the vast majority of borrowers at this point in time. A borrower, then, has two options: wait until a down payment can be saved or rent to own.

Homeowners Recovering from Lost Equity

In a bad recession, the value of homes can drop well below the initial buying point. In this situation, the home owner ends up in what is often called an "upside down" home loan. If the individual were to sell the home today, he or she would actually owe more money to the lender than the home is actually worth. As a result, the seller would not recover the down payment he or she initially placed on the home. Typically, this down payment, plus any earnings, would become a down payment on a future home. With a net loss instead of a net gain on the sale, the homeowner is essentially starting from scratch again. Rent-to-own options can be a good choice whenever a buyer is starting from scratch.

Homeowners Recovering from Bankruptcy

Another example of a buyer starting from scratch is any individual recovering from bankruptcy. Rent-to-own options provide a few key advantages in this situation. First, the borrower can get into the home without a down payment. Second, the borrower has time to establish a record of payment before applying for a mortgage to own the home. Payments made can help re-establish credit after it has been severely damaged in a bankruptcy case. 

Homeowners with Unknown Needs

The good thing about a rent-to-own option is the fact it does present so many options. Most rent-to-own contracts do not need to be executed until a given point in the future, usually years down the line. When a person moves into the property, he or she will have years to decide if it meets specific needs. If not, the individual can exit the rent-to-own contract with little penalty. If the option works out, the rent-to-own contract can move forward as desired. This is a good choice for a buyer not yet sure what he or she needs in a home but wanting to start the buying process.