By Grant Edrington – Updated June 19, 2023
Navigating the path to homeownership can be complex, especially when it comes to choosing between options like rent-to-own and different types of mortgages. Rent-to-own agreements combine rental and purchase options, while traditional mortgages allow you to purchase a home via a loan you repay over a set period of time.
While each has its benefits, it can be difficult to decide which option may be a better fit for your unique needs and situation. So, which is right for you? Understanding the differences between rent-to-own versus a traditional mortgage can empower you to make informed decisions on your journey to homeownership.
In this article, we’ll take you through a deeper dive to help you better understand your options and make the best choice, preparing you for the road ahead. We’ll cover:
- What to expect with rent-to-own
- What to expect with a traditional mortgage
- Should I rent-to-own or buy a home?
- Is rent-to-own cheaper than buying?
- Does rent-to-own affect your credit score?
- Rent-to-own a home with Divvy
What to Expect with Rent-to-Own
Rent-to-own is a unique avenue toward homeownership. It allows you to rent a home with the option to buy it after a set amount of time. With a rent-to-own program like Divvy, our application process is generally less stringent than applying for a traditional mortgage, and, among other criteria, we only require a credit score of 550.
Once you’re approved, you have the option to choose a Divvy-ready home or any home on the market that meets our requirements and fits within your approved budget. We’ll buy the home on your behalf, then you’ll move in just like you would with a home of your own.
Throughout a rent-to-own program like Divvy, part of your monthly payment can be put towards your homeownership goals such as a down payment. If you decide not to purchase the home, you can walk away with your savings, minus a relisting fee of 2% of the initial purchase price.*
*Plus any costs incurred due to unpaid rent, utilities, or damage to property.
Advantages of rent-to-own
There are several pros and cons of rent-to-own agreements. A rent-to-own program can provide several advantages for potential homeowners, such as:
Lock in the home you want
With a rent-to-own contract, you can secure the home you love now, move in, and purchase it in the future.
Build your credit
Making payments on time might help your score if you have bad credit. In some cases, on-time payments may be reported to credit bureaus, helping to boost your score. In instances where they don’t, renting-to-own gives you time to improve your credit before applying for a home loan.
Flexible down payment
Rent-to-own agreements typically allow for a smaller upfront payment compared to a traditional mortgage. With Divvy, you make an initial payment of 1-2% of the purchase price, then a portion of your monthly payments after that can go toward savings if and when you decide to purchase the home.
Try before you buy
Rent-to-own gives you the chance to live in the home you plan to buy before you actually purchase it and get locked into a mortgage. This keeps your options open in a way that traditional mortgages do not.
Wait out interest rates
Rent-to-own agreements typically span several years. If interest rates are high when you enter the agreement, they may be more favorable by the time you’re ready to buy. This allows you to lock in the home without necessarily being locked into a high rate.
The amount you’ll pay for the home is outlined in your rent-to-own contract. This can be advantageous if market housing prices increase above the pricing stipulated in the contract. At Divvy, we set purchase prices at the beginning of your lease.
Most rent-to-own companies include closing costs, taxes, and insurance in the agreement, simplifying the process and lessening homebuyers’ financial burden when they first get into the home.
Disadvantages of rent-to-own
Rent-to-own agreements certainly provide unique benefits, but it’s equally important to be aware of aspects that may not align with your financial or personal circumstances. Approaching these contracts with a holistic view can help ensure a positive and rewarding experience.
Here are a few things to keep in mind when considering a rent-to-own agreement:
Purchase price may be higher than appraised or value may decrease
In some instances, the agreed-upon purchase price in the contract may be higher than the appraised value of the home. This could make the closing process more difficult. Conversely, market fluctuations could lead to a decrease in home value, potentially impacting your investment.
Higher monthly payments
Monthly payments may be higher than typical rent.4 With Divvy, this is because a portion of each payment can go toward your Divvy Savings if you purchase the home.
Longer lease and commitment
Depending on your rent-to-own agreement, you may have a lease that’s several years long. If you decide you no longer want to live in the home or neighborhood and leave early, you may have to pay termination fees for ending the lease early.
What to Expect with a Traditional Mortgage
A traditional mortgage means you borrow money from a lender to purchase a home, then repay that debt over several years.1 Traditional mortgages are a more conventional route to homeownership and come with their own benefits and drawbacks.
Advantages of a mortgage
Traditional homeownership can offer benefits that a rent-to-own agreement cannot. Even if you have less-than-ideal credit, you may still be able to purchase a home outright, as many accessible homebuying options exist. Advantages of traditional homebuying methods include:
Once the mortgage is approved and the transaction is complete, the home is yours for as long as you abide by the conditions of your mortgage.1 There are fewer variables than a rent-to-own agreement once you’ve closed on the home.
With a traditional mortgage, you become the homeowner right away, giving you full control and rights over the property.
The process of buying a home with a mortgage is often more straightforward and well-understood than rent-to-own. Most traditional options have established procedures and regulations that guide each step.2,3
Remember that the choice between a traditional mortgage and a rent-to-own agreement will depend on your specific circumstances, financial situation, and long-term goals.
Disadvantages of a mortgage
While traditional homeownership offers numerous benefits, it’s important to consider some of the potential challenges or drawbacks you may encounter. Here are a few you should be aware of:
Mortgage lenders have more stringent requirements around credit scores, debt-to-income ratio, and – in some instances – income consistency and employment type, which may make it more difficult for self-employed or contract-based employees to get approved. Depending on your personal financial circumstances, getting approval might be more difficult than a rent-to-own agreement.
Down payment size
Traditional mortgages often require a down payment of 3–20%,2,4 which could present challenges for many prospective homeowners.
Commitment to a specific location
When you purchase a home, you’re investing in a specific location. If your circumstances change and you need to move, selling your home and buying a new one—especially if market conditions for sellers are unfavorable—can be a complicated and expensive process. Rent-to-own agreements typically offer greater flexibility.
These challenges can seem daunting, but some prospective buyers are able to achieve homeownership with the aid of resources and support systems that fit their needs. Your individual situation and homeownership goals will determine if a traditional mortgage is the best option for you.
If you’re considering buying your first home, here are some first-time homebuyer programs that might help kick-start your journey.
Should I Rent-to-Own or Buy a Home?
The path to homeownership is far from a one-size-fits-all journey. It’s a nuanced decision that is unique to your personal finances and long-term goals.
Rent-to-own often works for those who need a more accessible path to homeownership than a mortgage. Rent-to-own agreements can give you time to improve your credit or save for a down payment while living in the home you hope to purchase.
If you just got a new job or are self-employed, rent-to-own may also be a better fit for you. Divvy usually looks at your past 3 months of income history when assessing your application, and we work with many self-employed or contract workers.
Rent-to-own agreements can offer greater flexibility, accessibility, and a “trial period” in a specific home and area before committing to ownership, making them a good fit for aspiring homebuyers. Even so, it’s critical to weigh the risks, such as unpredictable housing trends.
With a traditional mortgage, your money goes toward tangible ownership of a property, and the home is yours as soon as you close on it. Some consumers might also find the contractual obligations that come with a traditional mortgage easier to understand.
It may be difficult to get approved for a loan if you have limited job history, poor credit, or no down payment, but it’s not impossible. A lender can discuss your options with you.
At Divvy, we encourage you to pursue a traditional mortgage if you can qualify for one and if it aligns with your goals. If not, we could be a good option to get you on the path to homeownership.
Is Rent-to-Own Cheaper Than Buying?
So, is rent-to-own cheaper than a mortgage? Ultimately, the answer is maybe. It depends on the property, how the rent-to-own agreement is structured, and how the home’s value changes over time.
The initial costs tend to be lower, with lower initial payments and no immediate closing costs. Plus, a portion of your monthly payments can be put toward savings you can use if you buy the home, so you may have enough saved to cover your down payment at that time.
Conversely, the size of a monthly payment can vary based on a number of factors, including your initial contribution, the purchase price of the home, your savings goals, and interest rates.
Does Rent-to-Own Affect Your Credit Score?
While rent-to-own agreements aren’t a guaranteed path to credit improvement, they can give you time to improve your score before trying to secure a home loan.
Although these agreements don’t always report to credit bureaus, if you’re renting-to-own with Divvy, we can report on-time payments to some credit bureaus. We also have credit counseling partners to help residents better understand how to boost their credit scores and increase the odds of improving their credit score – and securing a better rate – when they’re ready to purchase a home. Learn how you can rent-to-own with bad credit.
Rent-to-Own a Home with Divvy
Not ready for a traditional mortgage but want to work toward homeownership? Divvy’s got your back. We understand the obstacles that come with traditional homebuying, and we’ve created a rent-to-own program with the belief that everyone deserves an accessible route to homeownership.
With Divvy, you’ll be able to choose from our inventory of Divvy-ready homes, or you can pick one for sale on the market that we can put an offer on. You can save money for your down payment while renting, and you’ll have the option to buy the home at preset prices noted at the start of your lease. If you decide not to purchase the house, you can keep your savings if you’ve been in the property for the 3 years of your lease.
At Divvy, we’re proud to work with people who fall through the cracks of the traditional homebuying system, offering a unique way to get a leg up in the homebuying process. If you have low credit, need more time to save for a down payment, and have a strong desire to own a home, learn more about how Divvy works today.
1 Shopping for a Mortgage FAQs (ftc.gov)
2 What Is a Mortgage? (consumerfinance.gov)
3 Banker Resource Center: Mortgage Lending (fdic.gov)
4 Preparing to Shop: Determine Your Down Payment (consumerfinance.gov)
Grant is a member of the marketing team and focuses on connecting aspiring homeowners in our metros with Divvy. He's worked on marketing teams spanning all parts of the homeownership journey, including home loans, power tools and home improvement, siding and flooring, and now Divvy. Grant graduated from Villanova University and became a homeowner in 2021.