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Owner Financing and Rent-to-Own — What's the difference?

You're likely aware that there are many different mortgage loan options available when you're looking to buy a home. But what about some of the less traditional options like rent-to-own or owner financing? The good news is that both of these options can result in homeownership but are accomplished in different ways.

rent-to-own and owner financing options - what's the difference?

Rent-to-Own

A rent-to-own property or a lease-purchase is when you enter into a rental agreement that includes an option to purchase the property at a later time (typically within a few years). However, until that time the landlord still holds ownership of the property and is responsible for the mortgage.

You can expect to pay a substantial down payment for a rent-to-own, much higher than a standard security deposit. But this amount will still be less than what would be required for a traditional loan. The rent-to-own contract will include a clause outlining the current sale price of the property, how much of the rent goes towards the sale price each month and the length of time the property can be rented before it must be purchased.

Why rent-to-own?

  • Quicker move-in timeline and you don't have to wait on a bank
  • Gives time to build or rebuild credit
  • Allows more time to save money
  • You can learn about the area & neighborhood before committing to buy

The downsides

  • Higher monthly payments to cover amount towards down payment
  • If financing through a bank is still unavailable to the renter/buyer at the time a purchase is required, the extra money paid could be lost
  • You're relying on the homeowner's finances and if a foreclosure were to take place you would be forced to move out and could lose the money you've invested

reasons for rent-to-own financing

Owner Financing

Owner financing is when the owner of the property acts as the bank and finances the property for the buyer instead of a traditional mortgage lender. This is different from a rent-to-own option in that the buyer actually purchases the home and owns it upon closing.

A promissory note is constructed between the buyer and seller outlining specifics such as the term of the loan including the interest rate, monthly payments, what should happen upon default and any other necessary clauses. The owner will sometimes keep the title to the property until the buyer pays the loan off. In many cases, the loan will be spread out over several years with a large payment (balloon payment) due in five years. The goal would be that after a number of years the buyer's finances will have straightened out and they can secure a conventional loan for the remainder of the loan.

Why owner finance?

  • If you have bad credit, are self-employed or it's difficult to prove income
  • Gives the ability to move in right away unlike a conventional loan
  • There is flexibility with the down payment and overall move in costs are usually lower

The downsides

  • Interest rates are generally higher when owner financed
  • In many arrangements, a large sum of money (known as a balloon payment) is due after 5 years. In the case you cannot make this payment, it's possible to lose the house and finances you've invested.
  • You may need to disclose to the owner why you couldn't qualify for a conventional loan

reasons for owner financing to buy a home

All loans have their benefits and downsides however rent to own and owner-financing are some great options for individuals who may not be able to purchase a home under normal loan guidelines.

While rent to own and owner-financing are similar in some ways, it's best to discuss your unique situation with an experienced Real Estate Agent who will be able to suggest the best option for you. Even though neither of these options are considered a more traditional means to purchase a home, it's exciting that there are more options than ever to help everyone reach their goal of homeownership no matter their current financial situation.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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Ready To Become A Smarter Homebuyer?

By signing up, you agree to Nestiny terms of use .
Whether you need a step-by-step guide, video resource or one of our many helpful tools, Nestiny has your back 24/7 for all things home buying and selling. You choose the pace, material, and when and where to learn. Unlock your free access to Nestiny today!
Are you a real estate professional? Go here .
By clicking this button, you'll enjoy free unlimited access to Nestiny and agree to our terms of use . And don't worry! Nestiny will not share your information with any parties without your consent.