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Rent-to-own agreements have historically been a practical solution for prospective purchasers who were unable to qualify for traditional financing at the outset but expected to do so within a year or two. These arrangements allowed individuals to occupy a property while making payments toward an eventual purchase, bridging the gap until mortgage approval was possible.
However, recent changes in federal compliance requirements – particularly under Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) rules – have significantly altered the landscape. Today, the source and flow of funds are critical factors in determining whether a purchaser qualifies for financing. Payments made under a rent-to-own agreement can create complications that lenders are increasingly unwilling to navigate.
Why Lenders Are Saying "No"
- Many lenders now view rent-to-own arrangements as high-risk. In fact, the mere mention of "rent-to-own" in an application often results in an automatic denial.
- Under FINTRAC rules, lenders must verify the origin of funds used for a down payment. Payments made to a vendor during the rent-to-own term do not meet these requirements in a straightforward way.
- As a result, even after years of payments, purchasers may find themselves unable to secure financing without unwinding the entire agreement.
What Should You Do Instead?
While rent-to-own agreements once served a useful purpose, they now pose significant risks and hurdles. If you are considering creative solutions to help a purchaser who cannot yet qualify for financing, seek legal advice before proceeding. There are alternative structures that can achieve your goals without jeopardizing future mortgage approval.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
