When the buyer doesn’t qualify for a traditional home mortgage, frequently they’re looking for a rent to own home or an owner financed home. There are significant differences between these two, even though they sound similar.
Most rent to own properties give the buy the “option to buy the home in the future. Until that time, the seller is still the owner of the home. The seller’s name remains on the deed, and they’re still responsible for the mortgage payments.
The buyer is actually just the renter at this point with the right to purchase the home someday. The renter is not obligated to buy the home and frequently do not.
With an owner financed home, ownership of the property changes at the beginning. The buyer become the owner at closing. The buyer pays the owner a monthly payment that’s reducing the loan amount after a purchase that has already happened.
Similarities
In both rent to own and owner financing, the buyer makes monthly payments to the seller. In both cases, the buyer is ideally working on building their credit in order to qualify for a traditional mortgage in the near future.
Differences
The primary difference between rent to own and owner financing is the timing of the transfer of ownership. With owner financing, the deed transfers at closing. With rent to own, the deed doesn’t transfer until the renter exercises their right to purchase the home with a mortgage within the timeframe allowed in their rent to own agreement.
Risks
In a rent to own house, renters trust the owners are paying their mortgage. Otherwise, there’s a risk the property could be lost to foreclosure at no fault of the renters. Renters also risk the deal falling apart if they fail to make the payments on a timely basis. This is a risk for the owner as well, because they hope to eventually sell the property to the renters.
Owners assume the same risk with owner financing, but it’s more costly to evict, since the deed already transferred to the buyers. And, in both cases, the owner assumes the cost of finding another buyer or renter.
With either purchase plan, there are many things that go wrong, because two parties have an interest in the property. But most of the risks surround the failure of one party or the other failing to make payments in a timely manner. For these programs to work, both parties need to make payments in full on time.
If you are interested in a rent to own home or an owner financed home in the Little Rock or central Arkansas area, we’d love to talk to you. We frequently have homes available to purchase in one of this ways. You just need to get our list.
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