Rent or rent-to-own: What's the difference?

As a renter, you've always wished that you could own your own home -- but scraping together the money for a down payment is unrealistic. Maybe your credit score has suffered along with the ups and downs of the economy, as well, making it uncertain whether you can even get a conventional mortgage.

Those kinds of situations can make a rent-to-own property very appealing. Before you proceed, however, below is some information you need to know.

How is rent-to-own different than renting?

When you're just a tenant, the landlord is basically responsible for all of the upkeep on a property, the taxes and other big expenses. When you rent-to-own, you gain an ownership interest -- and a lot of new responsibilities. You have to pay the taxes, make any improvements and handle any repairs yourself. You also get the right to take the interest off your taxes and the lender can't evict you without foreclosing. On the other hand, you usually pay a hefty down payment (although less than you would buying a home conventionally) and your monthly payments may be higher -- although a portion of that monthly rent is ultimately credited toward your purchase.

What can go wrong with a rent-to-own?

Unfortunately, a lot of things can go wrong. While there are plenty of success stories out there, here are some of the potential disasters you may face:

  • You may not have an opportunity to do a home inspection prior to making your agreement. That can leave you holding a distressed property that has more problems than you can afford.

  • Sometimes a house will have encumbrances or ownership issues that make it impossible to sell or you may risk a loss through foreclosure if the owner failed to pay old taxes or their own mortgage on the property

Rent-to-own properties aren't necessarily a bad idea if you can't swing a conventional mortgage, but they need to be handled carefully so that your rights and money are protected. Make sure that you have an experienced attorney's assistance before you proceed.