In a "rent to own," you are renting a property with the option to purchase it at some point in the future. Often, it's 2-4 years. Usually, you pay an up-front option fee. It is NOT--repeat NOT--a down payment. It is NOT a deposit. It is an option fee, which means that it buys you the right to purchase the property in the future. That's why it's typically non-refundable--because whether or not you choose to buy, you've paid for and received something valuable--the RIGHT to purchase.
Often/usually the option fee is credited toward the purchase price if you choose to buy. And often some portion of your monthly rent is also credited toward the purchase price. That's all negotiable. As with the option fee, if you choose not to buy, you lose those option credits.
The amount of the option fee is negotiable. I've done lease-options putting nothing down . . . not a penny. The average is probably somewhere between 2% and 4%. The time frame varies, but--as I mentioned above--many lease-options are in the range of 2-4 years. If you decide to purchase, you go to a lender, get a mortgage, and buy the place from the seller.
Owner financing is completely different. In this case, you are making a down payment. But it's totally negotiable. On average, it's probably greater than the amount paid for the option under a lease-option, but it doesn't have to be. An owner could do owner financing with zero down. I've seen agents suggest that owners ask for 10%-20% down. If they can get it, that's fine. But I doubt that too many of them do.
With owner financing, the owner is serving as the bank. Remember: With the rent-to-own situation, at some point you go to a bank, get a new mortgage, and buy the place. With owner financing, the deed is transferred to you and you make your payments directly to the seller. So you negotiate whatever terms work for you and the seller. It might be a 5%, 30 year, fully amortized mortgage . . . similar to what you'd get from a bank, though sometimes with a higher interest rate. It could be a 15 year note. It could be a 5 year note, amortized over 30 years, with a balloon payment. (In that case, after 5 years you'd have to go out to a lender and get a loan to cover the balloon.) It could be anything you and the seller agree on.
The main point, though, to address your question is: With a rent-to-own, you're renting until you choose to buy. At that point, you go out and get a mortgage and pay the seller. With owner financing, you're buying immediately and the seller is acting as the bank.
Hope that helps.
If you are considering selling your home via seller financing and interested in receiving all or most of the cash at closing - to pay off your existing mortgage or be free from any libilities of holding the note... I could pay cash for your note.
Feel free to contact me if you wish to discuss the program criterias or procedures moving forward.
Celine Fang / Program Specialist
Boston Creative Financing Group
504.723-9269 - Business
It sounds like you are thinking about selling your home and thinking about different options to market it. If so, I would be happy to sit down with you and discuss all your options. I have been selling in the Raleigh area for over 17 years and sold over 1500 homes. It is free to sit down and discuss all of your options. Just contact me here through Trulia and I would be happy to meet.
Right now, your intention is to purchase the house but for some reason you cannot complete the purchase until some time in the future that is outside a normal closing time frame. Rent to own, or rent with option, gives you a period of rental in or after which to complete a purchase. (Maybe there are credit factors that impede your mortgagability right now, or maybe there are personal factors that are coming into play). There will be a rental agreement as well as a purchase agreement with a stipulated future completion date. Typically you would negotiate a down payment and then a monthly payment during the period before closing that combine to make the total non-refundable down payment. Toward the end of the period to completion you would go through the mortgage process just as you normally would, and the lender and attorneys will put the closing together and get title transferred. The rental period could be as short as a few months to 2 years and you would have a lease and put down a security deposit and pay rent monthly just like a normal rental. There would be two separate payments each month - the rent and the down payment. So, again, you would have a lease, as well as a purchase contract. At the end of the rental period you would complete the purchase contract and close title but, if for some reason you could not purchase after all, you would lose your down payment money. It gives you the buyer a chance to repair any credit deficiencies preventing financing or to accumulate a down payment that a lender would require, or resolve other issues; it also locks you into a purchase price if the market is escalating rapidly, which could save you many thousands of dollars. By virtue of being non-refundable, the down payment protects the seller from the risk of taking their home off the market and perhaps not being able to achieve the same purchase price at the end of your rental period should you choose to walk away.
Seller financing is just that. The seller acts as your lender. They still want to see decent credit, mortgagability, a down payment. But if you will be more traditionally mortgagable in a few years, you might be able to have short term owner financing with an agreement to convert to traditional financing at the end of a certain time frame. Or, the seller may just be willing to hold the loan for the entire term because they can make a bit more money and can afford to extend credit. The seller will file a lien against the house just like a traditional lender would and, if you default on the loan, they will foreclose and again own the home.
Hope this helps take some of the mystery out of these processes.
And, by the way, check your local and state laws about title transfer; in some states the mortgage lender is the owner of record until the debt is paid.
In Seller Financing, you would expect to own the property, encumbered by a loan and deed of trust.
You would be an owner.
Rent to own is undefined, but you would not own until you finance or pay the purchase price.
You would be a tenant.
Do not venture into either without legal counsel from your own attorney. These are not arrangements that can be properly done verbally or by laymen, or that you should enter into casually.