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A rent-to-own agreement could be your gateway to buying a home, allowing you to rent now and purchase later, often regardless of a low credit score. In this guide, we’ll help you understand how to navigate the rent-to-own process with bad credit and explore your options to transition from renting to owning.

We talked with real estate professionals who specialize in the rent-to-own process in order to get an insider’s look at how to navigate the rent-to-own market from a buyer’s perspective. Their expert knowledge brings clarity and understanding to what could otherwise be a confusing transaction.

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What does rent-to-own mean?

Basically, a rent-to-own real estate purchase means that you can live in the house as a renter with the intent to close on the home at a date in the future.

Amani Warden, a real estate agent with years of rent-to-own experience in Tampa, Florida, says it’s important to realize that there are two different types of rent-to-own contracts.

But what if that sequence of events doesn’t work for everyone? Sometimes, you don’t have enough cash saved up for a down payment, or you’re between jobs and can’t qualify for a loan. Maybe there’s a divorce that hasn’t been settled yet, or another financial obstacle is in your way.

If that’s the case, there’s an alternative route to homeownership you may not have considered: finding a rent-to-own home. These arrangements, when structured properly, can bring a lot of benefits to both the buyer and seller.

However, it’s not always easy to uncover these opportunities by simply browsing real estate listings or driving through your dream neighborhood, and you have to be wary of unscrupulous sellers. We talked to expert agents experienced in the rent-to-own process to show you exactly where to look and what pitfalls to watch out for.

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What is a rent-to-own home?

A rent-to-own home is an agreement that allows the renter to buy the home from the landlord after a specific lease period. With a rent-to-own contract, you’ll have to pay a lease option fee upfront. This is essentially a security deposit that ensures your right to purchase the property at the end of the lease. In some cases, this fee will be applied to the down payment at the end of the lease term. Lease option fees vary widely, typically ranging from 1% to 7% of the purchase price.

The purchase price of the home is locked in upfront to save any negotiation at the end of the lease. Rent payments will then include a rent premium, or the portion of monthly rent set aside in an escrow account to be applied toward the down payment. Because of the rent premium, however, it will look like you’re paying an above-market rate. This money will eventually come back to you in the form of a down payment, but if you choose not to exercise your option to buy, that money may be lost.

Let’s take a closer look at the two types of rent-to-own contracts:

Lease option

A lease-option contract is similar to a standard rental lease but includes an option to purchase the home at the end of the lease term. If you choose not to buy, you will lose the option fee and, depending on the terms of the contract, possibly the down payment and any equity in the property.

Lease purchase

A lease-purchase contract means that the buyer is obligated to buy the home at the end of the lease term. If the buyer decides to walk away or doesn’t qualify for a mortgage at the end of the lease, not only do they risk losing their deposit, down payment, and any equity, but they also may be left open to legal action since they broke the terms of the contract.

Pros and cons of rent-to-own agreements

So let’s say this sounds like your situation, and you like the idea of renting to own, but you aren’t sure whether such a program exists to help you get your foot in the door — or even how to find a rent-to-own home that works for you.

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Well, here’s some good news: There are multiple rent-to-own programs and lease-to-own options available to prospective homeowners. We’ve reviewed a variety of programs and sought advice from an experienced agent to help you understand your options.

Ahead, we compare four of the most reputable and legitimate rent-to-own programs to help you answer the question, “Is rent-to-own a good idea?”

Sometimes, the best option to get into the home of your dreams is a rent-to-own deal. However, rent-to-own contracts have unique components that you might not see in other real estate agreements. So, how does the process work? And what are typical rent-to-own terms and conditions?

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The terms

1. Is your contract a lease option or lease purchase agreement?

The first important thing to understand about your rent-to-own terms is the type of agreement. You should know whether you are entering into a lease option or a lease purchase agreement.

With a lease option, you have the option (but not the obligation) to buy the home you are renting when the contract is up. According to the National Association of Realtors (NAR) website, lease-option agreements (aka rent-to-own) are generally utilized in residential real estate deals when a homebuyer would like to purchase a home, but needs to repair their credit rating in order to secure a promissory note and mortgage.

With a lease purchase agreement, you are legally obligated to buy the home when the contract is up.

A lease purchase agreement, however, “isn’t in the best interest of the landlord or anyone selling property, and it isn’t something I would ever advise any of my clients to do,” says Erick Monzo, a top-selling real estate agent from the Monzo Group serving the Detroit market.

To build our easy-scan pro and con lists, we talked with Maureen Connolly, an agent with 22 years of experience in New York, and Brad Korb, a top-ranked agent in Burbank, California, with 45 years of experience. Their expert insights can help you uncover all the advantages and disadvantages of a rent-to-own real estate purchase.

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What is a rent-to-own agreement?

Renting with the intent of owning your own home typically has two options:

1. A rent-to-own deal, also known as a lease option agreement, allows renters the opportunity to purchase a home after a specified amount of time (typically 1-3 years) while living in the property as a tenant. You are not contractually committed to buying the property.

2. A lease purchase agreement requires the renter to buy the home when the lease is up, and it comes with a lot more stipulations — and commitments — than lease option agreements. Therefore, buyers should approach lease purchase agreements with caution.

Because it requires a signed contract and a monumental commitment, we’ll exclusively examine the pros and cons of a lease purchase agreement.

To make sure your lease purchase agreement is solid and fair for both parties, follow these essential steps:

• Consult a real estate attorney: A legal expert can review the contract, explain any complicated terms, and ensure there aren’t any hidden clauses that might put you at a disadvantage as a buyer.
• Get a home inspection: Korb suggests thinking of a rent-to-own agreement “like a long escrow period.” Just as you would with any home purchase, insist on a full home inspection before signing. This way, you won’t be surprised by costly issues down the line, especially since the seller doesn’t have to make repairs.
• Talk to your lender: Discuss your situation with a lender to gauge your chances of securing a mortgage by the time the rental period ends. Knowing your options in advance can save a lot of headaches.
• Get the seller’s disclosures: Your agent can assist you in obtaining any required seller disclosure forms or statements. You should also check for any past insurance claims and confirm the title is clean and free of legal issues.

But before you sign, be prepared: Rent-to-own agreements carry more complexities and potential pitfalls than a standard lease. Knowing every detail — and how to protect your interests — can make all the difference in turning this dream opportunity into a smart investment.

Here’s what you need to understand to make an informed choice.

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How rent-to-own home agreements work

Rent-to-own agreements typically combine a rental agreement with an option to purchase the home in the future. You agree to lease the home for a set period — typically two to three years — with the intention or option to buy when the lease ends. This gives you time to build savings or repair your credit while living in the house you plan to own.

But here’s the catch: Rent-to-own agreements come with more strings attached and carry significant financial and legal commitments. Real estate agent and attorney Ruth Wordelman, who has extensive experience with these contracts, emphasizes the need for caution. These agreements are not one-size-fits-all, and the risks involved can affect both buyers and sellers.

Buyer and seller rent-to-own risks

One of the biggest challenges of a rent-to-own agreement is determining the home’s purchase price in advance. Both parties must agree on a price today that will remain unchanged for several years. If the housing market skyrockets, the seller could miss out on potential profit. If the market drops, the buyer could end up overpaying and might even face difficulties securing a mortgage.

Additionally, if the buyer fails to improve their credit or save enough for a down payment, they may lose any upfront fees and extra rent paid toward the purchase price.

On the seller’s side, there’s a risk that the buyer will back out, leaving them to find a new tenant or potential buyer.

These contracts also lack standardized forms in many regions, so it is strongly recommended that an attorney review the terms.

Key components of a rent-to-own home agreement

A rent-to-own agreement typically includes two main sections: the lease option and the lease-purchase agreement. These can either be separate documents or combined into one. Here’s a breakdown of each:

• Lease option terms: Similar to a standard rental lease, this section outlines your responsibilities as a tenant. It includes details like the monthly rent amount, payment due dates, late fees, and any requirement to maintain renter’s insurance.
• Lease purchase agreement: This section addresses the home’s future purchase. It specifies the agreed-upon price, the timeline for closing, and your obligations for securing financing.

It’s essential to understand the difference between an option-to-purchase and a lease-purchase agreement. An option-to-purchase gives you the right, but not the obligation, to buy the home. In contrast, a lease-purchase agreement commits you to buy the home when the lease ends, even if your situation changes.

Even with the housing market cooling slightly in 2024, home prices are still on the rise. By the time you finally save enough, it often feels like the goalposts have shifted, making the climb even steeper. Meanwhile, the ongoing burden of rent drains a significant portion of your income, making it even harder to get ahead.

It’s no surprise that many prospective homebuyers are intrigued by rent-to-own agreements. In these agreements, renters lease a home with the intention of buying it later, and a portion of their rent payments goes toward a future down payment. However, rent-to-own deals come with significant risks, including the potential for scams. Buyers should thoroughly review contracts to ensure they have the option to exit the agreement if problems arise.

Despite these risks, rent-to-own arrangements have helped many buyers secure and eventually purchase their dream homes. When carefully negotiated and structured, these agreements can provide a viable path to homeownership, especially for those needing more time to save or improve their financial situation.

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We’ve put together the ultimate guide to rent-to-own homes. From understanding the risks and rewards to tips on finding rent-to-own properties, navigating contract terms, and more, this guide has you covered. Here’s a key takeaway: partnering with a top real estate agent can be invaluable in helping you avoid potential pitfalls and protect your future investment.

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Why rent to own?

A rent-to-own real estate agreement can be a great option for some buyers, but it’s not the best fit for everyone. Compared to traditional home financing through a mortgage, rent-to-own deals carry additional risks, which is why most homebuyers still opt for securing a mortgage.

That being said, rent-to-own arrangements can make sense under the right circumstances. Here are seven key reasons why renting to own might be worth considering.

1. Build or improve your credit

One of the main reasons some buyers consider a rent-to-own arrangement is to gain extra time to improve their credit scores before applying for a mortgage. While you can qualify for an FHA loan with a credit score as low as 580, having a higher score can secure you better interest rates. For conventional loans, the minimum credit score requirement typically is 620.

Opting for a rent-to-own home lets you move into the house you want today while working on your credit. This way, when you’re ready to purchase, your improved credit score can help you qualify for a mortgage that fits your budget and financial goals.

2. Build your work history

If you just moved to the country, or you just entered the workforce, then you might not have a deep enough work history to qualify for a mortgage loan. Typically, lenders will want to see at least two years in the same career, and preferably at the same company, so if you’re embarking on a brand-new career path, it might be more difficult to qualify for a loan temporarily.

Maybe you don’t want to wait until you’ve got two years of work history under your belt to start shopping for a house to buy, in which case, a rent-to-own home might work nicely for your situation.

3. Save money

Buying a house is costly. You’ll need a down payment — usually at least 3% for a conventional loan or 3.5% for an FHA loan — and closing costs, which can range from 2% to 5% of the loan amount. If a 20% down payment isn’t realistic, consider a loan with mortgage insurance (PMI), which adds a monthly premium. However, if you save 20%, you can avoid PMI, and some local programs might let you put down less.

“Rent to own could be an option for someone who just doesn’t have the ability to qualify to purchase right now,” says Ed Kaminsky, a top-selling Southern California-based agent with 37 years of experience.

“A buyer can save enough money for a proper down payment, or wait out an expected financial change — maybe they’re going to have a better job, get a raise, or maybe an inheritance. In time, they’re going to have the down payment.”

Indeed, rent to own can be a viable option for owning a house… but is it right for you?

In this expert-backed guide, we’ll walk you through the process of getting into a rent-to-own home as a buyer — step by step, from learning about how the process works to closing on that new home.

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Step 1: Educate yourself

As with any home search, you’ll need to understand the market as you explore the possibility of a rent-to-own home arrangement.

Isolate the specific area where you want to rent to own, and collect your data, including:

• How much is typical rent?
• How much does it cost to buy?
• How does that translate into monthly mortgage payments?
• Apart from housing costs, what’s the cost of living otherwise, and how much is it possible to save with your income while you work toward homeownership?

Further, take time to learn more about this type of purchase. Importantly, know the difference between a lease option (which only obligates the seller to offer to sell you the house when the time comes) and a lease purchase agreement (which obligates both parties to the sale — so yes, that requires you to go through with it, too).

As with any real estate transaction — or any major transaction at all, for that matter — an informed buyer is one poised to come out ahead.

Step 2: Find a rent-to-own home

First, talk to a local agent who is experienced with rent-to-own transactions. These come with specific terms and conditions, and experience is key.

An experienced agent can help you by conducting specific MLS flat fee listing, consulting their real estate network, and through general knowledge of market and area trends. You also might consider going with an agent or brokerage with a dedicated rent-to-own program.

You might work with your agent to contact a seller directly. For instance, an experienced agent can help you identify listings that have been lingering on the market for a long time, whose sellers might be particularly interested in a rent-to-own setup where they can take in some extra cash monthly while moving toward an eventual sale.

On the flip side, you might work with your agent to find a landlord who wants to get out of ownership and has simply been renting as a way to carry costs while ultimately hoping to get clear of the property.

Finally, work your own network. Maybe someone in your sphere — perhaps a friend, neighbor, or co-worker — wants to eventually get out of ownership and would be open to a rent-to-own arrangement. Put your interest out there in conversation and on social media, and you might turn up the perfect option in your own community.

Step 3: Negotiate with the seller

When you rent to own, you won’t be writing an offer that the seller accepts like you would with a regular sale. Instead, this looks more like a rental contract with additional stipulations, so both parties will want to make sure you agree on what it says.

“Negotiations have to do with the market conditions and the seller’s motivation,” Kaminsky explains.

Consider these points for rent-to-own contract negotiations:

• What will the purchase price of the home be? How will you determine that? (Will you get an appraisal and ballpark future value growth, for example?)
• How much is the option fee? (This is an upfront payment that might or might not be credited toward your down payment when you buy.)
• How much will the monthly rent be? Will there be a rent credit that goes toward your down payment?
• When will that purchase take place? (One to three years is typical.) Is there a renewal clause that lets you extend the contract term if need be?
• Who’s responsible for maintenance while you’re renting to own? (Usually, it’s the buyer — unless the issue is major. “If there’s a roof issue or a plumbing issue, the owners generally respond,” Kaminsky says.)
• Will there be additional fees or expenses? (How about dues to an HOA, for example?)
• Are there any restrictions on how you can use the house while you rent it? (Say, no pets, or no gatherings larger than 10 people?)

Step 4: Have a lawyer review the contract

This is pretty self-explanatory, but you don’t want to skip it.

Make sure the language protects your interests — and that a lawyer signs off. To protect yourself, consider adding contingencies (such as an inspection contingency) that allows you to get an inspection before you occupy the house so you’re fully aware of any existing conditions. To that end…

Step 5: Order the inspection

As a renter, you typically wouldn’t do any formal inspection as part of your contract. But as a rent-to-owner, you really want to know what you’re getting into, and a home inspection is the best way to do that.

It’s important to know the home’s condition in order to assess the sensibility of making the deal on your end. The intel from an inspection can also be helpful if you’ll be taking on some or all of the home’s maintenance needs while renting.

Step 6: Pay the option fee

At this stage you’ll pay your option fee, also called a premium payment or option consideration. This is an upfront payment that may be credited toward your down payment when you purchase the home.

Step 7: Move in and pay rent

Sure, it’s always important as a tenant to pay your rent on time. But when you’re renting to own, missing payments could kill your chance of ownership: In some cases, a late payment could void the rent-to-own contract. And if that happens, whatever you’ve paid toward the price of the home is typically lost, too.

By the way, it’s not just late payments that can jeopardize your chances at this stage either: other issues that could trigger a default in a rent-to-own contract include violating a no-pets clause or failing to make repairs in a timely fashion, to name two examples.

Step 8: Work on your credit

If you’re renting to own so you’ll have better loan terms when you buy in a few years, start working on your credit in preparation.

“It could be a situation where your credit score is low, and it’s going to take you a year to fix it,” Kaminsky says. “Maybe you have the down payment, but you have to build your credit score back up from the 500s or whatever it might be. So maybe it’s a matter of working with a credit repair company, or just taking care of the problems you’ve created with due payments. Carving out time to get that cleaned up is the perfect reason to consider rent-to-own.”

The higher your credit score, the better interest rate you’ll be able to get when it’s time to secure your mortgage loan. (Lenders offer much better rates to buyers with excellent credit scores, and that translates to big savings over the life of the loan). Ideally you’ll have a credit score of at least 620 to qualify for a conventional loan, though you’ll likely need a 760 or higher to get the best terms possible.

Here are some among the doable ways to improve your credit score:

• Pay down — or pay off — high-interest loans
• Put bills on autopay or schedule them on your calendar so you don’t miss any
• Don’t close any unused accounts
• But do request a higher limit on your best account
• Try to pay off your balances in full every month
• Ask that your rent is reported to the major credit bureaus so you can build credit while you’re renting to own

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Step 9: Save for closing costs

Don’t forget about saving for your closing costs. You’ll have to pay them at the time of closing, and they can surprise you if you’re not prepared.

Closing costs can run between 2% and 6% of the home’s purchase price.

Step 10: Ensure there are no title issues

Even if you had the title reviewed when you signed the contract, you don’t know exactly what’s happened with the seller financially since then… unless you check. So do so, and make sure the title is clean at this stage.​

Step 11: Apply for a mortgage

At the end of your contract term, it’s time to apply for that mortgage you’ve been working toward by saving and improving your credit.

When you apply, provide your lender with documentation for the premium payment and rent credits that you already made to the seller, in addition to the original purchase contract, the original appraisal (if you have one), and any inspections that were made during this time.

If the purchase price is significantly higher than the appraised value, you’ll have to go back to the seller to negotiate — or come up with the difference — because a lender is unlikely to approve a loan for more than the home is worth.

Step 12: Buy the house

Improved financial picture: check. Mortgage loan: check. Close on that new home: check.

You did it! Congratulations on homeownership.

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With a rent-to-own contract, you typically lease a home for a specified period with an option to purchase when the lease is up. That gives you a chance to clean up your credit or save for a down payment while living in a house you plan to own.

However, before signing the rent-to-own contract, be aware that the contract is different — and more complex — than any regular lease you’ve signed. Read it carefully, and be sure you understand precisely what you’re signing.

To help you understand the differences between a rent-to-own contract and a regular rental contract, we’ve spoken to a real estate agent and attorney who has handled several such deals, read sample contracts, and then collected the highlights around what you need to know.

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Buyer (and seller) beware

Rent-to-own home contracts come with risks for both the buyer and seller, says Ruth Wordelman, a longtime real estate agent in Colorado Springs who is also a licensed attorney. She has more than 27 years of real estate experience and has worked with over 77% more single-family homes than the average agent in her market. She has also handled several rent-to-own contracts for clients.

The biggest risk comes with pricing because the buyer and seller must agree today what the home’s price will be one, two, or three years down the road when the lease is up. If home prices rise substantially, the seller is leaving money on the table, she notes. If prices drop, the buyer is overpaying and may have trouble getting a loan.

The situation is made muddier because most Realtor boards don’t issue a standard rent-to-own contract. “I would recommend having an attorney review and explain all the risks to either party,” Wordelman says.

Rent-to-own home contracts

Unlike a standard lease for a rental house, the rent-to-own agreement generally includes two parts, a rental lease and an option-to-purchase agreement. They can be two separate documents or combined into one.

The rental lease portion should spell out the duties of the renter and landlord, with typical clauses covering topics such as the amount of rent, when it’s due, and whether the landlord requires you to maintain renter’s insurance.

The option-to-purchase spells out the agreed-upon price for the house, proposed closing date, when you need to secure financing, and other details about a future sale.

Be sure you’re signing an option-to-purchase and not a lease-purchase agreement. What’s the difference?

• With a lease option, you’re leasing the house and will have the option to buy it at the agreed-upon future date. However, you’re not legally obligated to buy the property, so you could drop out of the deal if you can’t get financing or move to another city.
• With a lease to own home program agreement, you agree to buy the house at the end of the lease. You may not be able to get out of the contract if you can’t get a mortgage or if you change your mind about the house.

Differences to consider

The rent-to-own contract has many clauses, and you may want to negotiate some of them to better accommodate you in case problems crop up.

1. Length of rental agreement

It’s not unusual for a rent-to-own lease to extend for two or three years. If you’re cleaning up your credit, you may appreciate the time to pay down debt. Before signing, negotiate what will happen if you want more time to work on your credit.

The agreement doesn’t have to cover an extended period, however. Wordelman had a client who signed a six-month rent-to-own agreement, allowing the buyer to complete a divorce before acquiring the house.

2. Inspection required

In a typical rental contract, you don’t usually get the property professionally inspected. But with a rent-to-own contract, it’s advisable to get a home inspection before signing.

You need to know the home’s condition to assess whether you’re getting a good deal or whether the property is in poor condition. Information from an inspection can also be helpful if the seller wants you to take over some or all of the home maintenance (more on that later).

3. Future sales price

The contract must contain a price for the house, which means you must decide today what you’d be willing to pay for a house one, two, three, or more years in the future.

Both the buyer and seller are taking a risk here. If the economy tanks and home prices fall before the sale date, the buyer could be locked into a price for more than the house’s fair-market value. In that case, they may have trouble getting a loan because of a low appraisal.

For sellers, the risk is that the local housing market will heat up before the sale date, causing local prices to jump. In that situation, the seller could have gotten more money by selling on the open market.

4. Upfront fee

Another way that a rent-to-own home contract differs from a regular rental agreement is the upfront fee.

The upfront fee is similar to earnest money when you buy a house, and it may be applied to the purchase when the sale closes. However, if you back out of the deal, the money may not be refundable. Again, read the contract to ensure the money applies to the sale and whether it’s refundable.

Because sellers want the deal to go through, they use a hefty upfront fee so that the buyer has “skin in the game,” Wordelman explains. “The seller wants the buyer to put in a lot of money so they won’t back out.” Her divorcing client put up $50,000 as a nonrefundable upfront fee, which was credited to the purchase when he went through with the deal. Typically, upfront fees range from between 2.5% and 7% of the sales price.

5. Above-market rent

In some cases, the seller will charge rent higher than the going rate and promise to apply the extra money as a purchase credit or down payment. The money should be kept in an escrow account.

Check the contract to be sure all the extra money you’re paying will be credited to the purchase. And remember that if you walk away from the house without buying it, you could lose all the extra money you paid.

Also, beware that being late on your rent doesn’t just mean facing a late fee in some rent-to-own contracts. Instead, paying your rent late can result in you losing the option to purchase entirely, plus losing all the extra rent and upfront fees you paid.

6. Maintenance

Some rent-to-own home contracts require the renter to take over home repairs. In a typical rental agreement, the renter may be responsible for basic maintenance such as mowing the lawn, but repairs to the home itself are the owner’s responsibility.

Sellers in a rent-to-own situation may argue the future buyers will reap the benefit of the repairs, so they should pay for them. They also believe the buyer has a vested interest in keeping the home in good shape. Of course, if you end up not buying the house, you also lose the money you put into the repairs.

You can negotiate who is responsible for the upkeep, but the contract needs to be very clear on issues such as who pays to replace the water heater should it break, Wordelman says.

7. Other fees

The rent-to-own contract may also require the renter to pay the property taxes for the home. If you agree to this, be aware that you can’t claim the property tax deduction on your federal income tax return unless you own the property.

The owner may also expect the renter to pay any homeowner association fees, and the renter can negotiate this arrangement.

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Additional points to negotiate

You need a carefully constructed lease to protect both parties in a rent-to-own home deal. Wordelman says, “You should hash out in advance how things will be resolved” in a variety of situations, such as the renter failing to keep up their renter’s insurance.

The Georgia Bar Association’s model lease with option-to-purchase contract suggests having terms and conditions covering:

• Price
• Expiration date
• Non-refundable option fee
• Percentage of rent applied to the sale
• How the buyer can exercise the option to purchase
• Rental rate, due date, and late fees
• Who is responsible for paying utilities
• Who is responsible for maintenance and repairs
• Security deposit details, if any, including how much may be returnable if the renter doesn’t buy the house
• Conditions, such as failure to pay rent, that cause the renter to default
• Provisions for a title examination
• Closing date for sale if the renter exercises the option to purchase

Beware of scams

The Federal Trade Commission warns that rent-to-own homes can also be a scam. Possible scams include:

• A “seller” who doesn’t own the property
• A home with unpaid back-taxes
• A home that needs expensive repairs
• A home going into foreclosure

Work with experienced professionals — real estate agent, attorney, and home inspector — to confirm that the rent-to-own home contract is a fair deal for you. Otherwise, the rent-to-own process that sounded like a perfect solution could bring you bigger problems than you signed up for!

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If you’ve decided a rent-to-own home could be right for you, you’ll want to make sure you’re clear on all the pros and cons. And you’ll need to understand the logistics for your specific arrangement.

Important among them: who handles any maintenance issues, and what are some biggies that might make you consider walking away instead of moving forward with this rent-to-own home? Our expert-backed primer covers all the maintenance questions buyers should be sure to ask about a rent-to-own home to help you avoid any difficult and potentially expensive situations.

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Why do buyers need to worry about problems in rent-to-own homes?

Well, that’s a pretty simple question to answer.

“The biggest reason why buyers have to worry about rent-to-own home condition is because that home will be theirs, officially, once they own it,” says top-selling Florida-based agent Kathy Aparo-Griffin. “So they’re going to have to deal with these issues.”

The specifics of that rent-to-own arrangement “all depend [on] how the agreement is written,” Aparo-Griffin explains. One common (but not always standard) inclusion in a rent-to-own contract is asking the buyer to handle any repairs needed while they occupy the house.

This stipulation has an upside for the buyer, too: if they are “going to treat their home as if they already own it, then any roof leak, nonfunctioning AC, any of that is going to be a problem in the future when they go to technically own it and get a mortgage and get rid of the seller from the transaction,” the agent notes. Taking care of any maintenance issues proactively will benefit the buyers long-term when they become homeowners.

Indeed, Aparo-Griffin says, “usually it’s the buyer” handling these responsibilities and costs in a rent-to-own situation.

“If you’re doing a rent-to-own, you are technically a vested, soon-to-be owner. So you have to treat that place as your own. It’s always up to the real estate brokerage firm that’s writing up [the rent-to-own agreement] to clarify that, but for the most part, it’s usually on the buyer.”

However, that’s not always the case. “I have written up some rent-to-owns where the seller is responsible up until a certain time period when the buyer actually gets a standard loan,” Aparo-Griffin says. So you have options!

Standard maintenance issues for buyers to expect

Every home comes with standard maintenance matters that owners — or owners-to-be — should keep top of mind.

Here’s a general list of things to think about.

Cleaning out the gutters

Who’s responsible for doing this, and when will it be done? Homeowners should remove any debris from their gutters and clean them out annually.

Clogged gutters can lead to roof damage — an expensive repair — so this ounce of prevention can save buyers significant money long-term.

Replacing air filters

Who performs the task, and who pays for the filters? Air filters range in price depending on the size and thickness of the filter. Thinner filters are supposed to be replaced monthly, while thicker filters can last up to a year (and are more expensive).

Dirty air filters waste energy because your systems have to work harder; they can even cause your HVAC system to overheat or malfunction. And, of course, replacing air filters will maintain good air quality in your home.

Maintaining landscaping

This may include mowing and watering the lawn, and generally keeping up the landscaping around the property.

Is this the responsibility of the buyer or the landlord, and at whose expense? Is there a professional service that handles this, and who arranges and pays for it, if so?

Landscaping isn’t simply a matter of curb appeal. Paying attention to how water drains around the home when you’re watering the lawn, for example, can alert you to structural issues with the house before they become acute.

Cleaning the fridge coils 

First, you’ll want to establish whose fridge it even is: will it eventually come with the house and pass to the rent-to-owner if it belongs to the seller?

Cleaning the fridge’s coils helps the fridge operate at maximum efficiency, so maintaining this part of the house will save the renter and future buyer money on their energy expenses. Plus, if the fridge is coming with the house, buyers will want to make sure it’s operating at peak condition, anyway.

Clean the dryer vent

Again, who owns the appliance in the long run, and who is responsible for it during the rental period? This is another example of a fix that can save buyers money on their energy bills, but backed-up lint and debris in dryer vents can also start fires. For $12 on Amazon, you can order a vacuum attachment to help you handle this maintenance job.

Other standard maintenance tasks

Other tasks for which to establish responsibility include such home maintenance issues as:

• Servicing the furnace (annually)
• Flushing the water heater (annually)
• Touching up exterior paint (as needed)
• Caulking windows (as needed)
• Minor plumbing repairs (as needed)

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Major maintenance issues that could change the game

Aparo-Griffin says she’d likely write in the contract that all of the maintenance issues under a certain dollar amount would fall to the buyer.

But that said, there’s a limit to what a buyer should be expected to handle in terms of home maintenance, she adds.

“Obviously if the roof is bad, you can’t expect somebody who’s renting to own to pay for a $10,000 roof.”

(She adds that if the parties do agree that buyers will be shouldering major home-maintenance responsibilities, the buyer must waive or remove any existing inspection contingencies prior to taking possession of the property.)

Let’s further consider that roof example.

“Some of the major issues that we run into a lot in Florida are that we have problems with roofs all the time because of hurricanes, hail, tornadoes, you name it,” Aparo-Griffin says. “You could need a whole new roof. You could have a leaking roof. I was in a house two weeks ago where water was pouring down the wall in the garage.”

So fundamentally, “the roof issue is a big one,” she explains — the biggest rent-to-own home maintenance concern, in her assessment. “You have to make sure you have a good roof because at the end of this, when the buyer goes to get financing, the buyer’s not going to be able to do that if the roof is an issue.”

Lenders want to confirm that the house is safe to occupy, and buyers who are hoping to get a VA or FHA loan for the house will need to ensure the house meets FHA or VA standards for safety and condition, too.

In short, examining potential costly future issues (especially the roof) “is probably the most important thing that needs to be done before you execute a rent-to-own contract.”

What are some of the other major issues that might make a would-be buyer want to walk away? Think extensive electrical issues, expensive plumbing repairs, widespread window or door replacements, or an HVAC system that needs extensive repair or even replacement.

What else to know about rent-to-own home maintenance

The home should be on a service plan during the rent-to-own term, which is in both the seller’s and the buyer’s best interests.

“You should have a once-a-year maintenance check and specify who’s going to pay for that, so as a seller you know your investment is protected,” Aparo-Griffin explains. “You know the buyer’s not going to get in there and run it into the ground.”

Remember that while the rent-to-owner is renting, the seller still owns the property. So the seller must carry homeowners’ insurance, and both parties will want to specify who’s going to pay the insurance deductible.

“If it’s a rent-to-own, the most the buyer could get is a rental [insurance] policy,” Aparo-Griffin notes. “But the homeowner still has to have homeowners’ insurance. If there is a fire, if there is a claim, if there is a hurricane, the buyer can’t make a claim. It’s not their home yet.”

So make sure to button up that insurance issue as one part of the essential home maintenance matters you’ll definitely want to clarify when entering into a rent-to-own home arrangement.

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Could a rent-to-own agreement be just right?

To be sure, it’s a less-traveled path. Just 1% of homebuyers purchase the home they previously rented, according to a 2024 report from the National Association of Realtors. (That figure doesn’t capture renters who ultimately walk away from a rent-to-own situation — more on that later.)

You may be asking, “What should I know about rent-to-own homes?” To find out, we talked to experts like Rick Fuller, a real estate agent in the San Francisco Bay Area, Eric Dunn, director of litigation at the National Housing Law Project, and Robert A. Miller, a real estate attorney based in Prescott, Arizona.

This primer will tell you what you should know about rent-to-own homes: the good, the bad, and the ugly.

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What is a rent-to-own home?

With a rent-to-own agreement, you make an agreement with the seller that they will either sell you their house or offer you the option to buy after a certain period of time (usually within one to three years).

Once the agreement term concludes, you pay a down payment, secure a mortgage, and transition from tenant to owner. The rent payments you made may reduce your purchase price, contributing to your down payment, and lowering your total mortgage loan.

Fuller, who has 21 years of experience, shares a rent-to-own buyer success story. His team represented a seller who rented a Brentwood, California, house to a tenant interested in eventually buying the property. Over five years, the tenant paid a couple extra hundred dollars a month over her monthly rent, eventually taking the option to buy and contributing more than $10,000 to her down payment.

“The nice thing was … this particular buyer bought the property with this option, and they bought it with a price tag of five years ago,” Fuller says. “This really works in an escalating, rising market for a buyer.”

Understanding your options: lease option or lease purchase

To get the agreement that works best for you, it’s important you work closely with an experienced real estate agent. While your exact arrangement will be unique to your situation and the seller’s, it may fall into one of two types: lease option or lease to own home program.

Lease option

This path is similar to a standard rental lease. The big difference is, you pay an option fee to purchase the home at a later date. This option fee locks the sales price, but you’ll still owe a down payment at the time of purchase.

Lease purchase

If you opt for a lease-purchase agreement, part of your rent will typically go toward your eventual down payment (some lease options have this feature as well). This means you are likely trading a higher monthly rent for a lower down payment at the end of the term. Once your contract ends, you are obligated to buy the property.

How does rent-to-own work? 7 important things to know

1. Option fee

If you opt for the lease option route, the seller may ask you to pay what’s called an option fee (also known as premium payment or option consideration). It’s typically between 2.5% and 7% of the agreed-upon purchase price, and it locks your sales purchase price. You can negotiate whether the fee counts toward your down payment.

The money usually isn’t refundable, so if you default on the contract’s terms, or choose not to purchase the house, the homeowner can keep it.

2. Purchase price

When you sign a contract with the current homeowner, you’ll agree to the future purchase price. Here’s where working with an experienced real estate team comes in handy. “For a tenant, knowing the trajectory of the real estate market is important,” Fuller says. “If you secure an option and identify a purchase price, and the market declines, then nobody is going to exercise that option to buy a home above what market value is or even above what the property would appraise for.”

“Working with a real estate agent and understanding the local dynamics of that market are imperative for a tenant,” he adds.

3. Rent payments

Just as you would with any rental, you should expect to pay monthly rent payments while you rent to own. Make sure you’re paying your rent on time, every single month. Late payments could jeopardize your contract.

4. Rent credit

In some rent-to-own agreements, part of your rent will go toward your eventual down payment.

5. Maintenance agreement

If you’ve been a renter, you’re used to calling your landlord when something breaks. That might not be an option with a rent-to-own home. Depending on how your contract is written, it may be your responsibility to replace the fridge when it stops running or pay the plumber to fix a leak.

These costs can add up — especially if you decide not to purchase the home.

6. Lease term

The term of your lease, or the time limit, is how long you’ll rent the house before you opt to buy it (or have to, depending on your contract).

7. Closing the sale

Your path here was different, but you’ll still go through that same rite of homeownership: getting a mortgage and closing. You’ve already got the keys in your pocket and your shoes in the closet, but when you close you’ll officially be the homeowner. Make sure you’re prepared to pay the typical closing costs.

Pros and cons of rent-to-own

Deciding to purchase a home is a big life decision; so is deciding to rent-to-own. Here are some pros and cons to weigh.

Pros

For certain aspiring buyers, a rent-to-own arrangement can be a good fit. “If someone finds a property that they’re renting that they would really like to purchase, this can be a good option,” says Fuller.

One reason is because they can lock in a price.

“You can actually secure a price and then buy the home a year, or two years, or even three years later, and the equity that is accumulated over those several years is something the buyer could benefit without actually having ownership of the property,” he says.

It can also be structured to provide you with a “forced savings account,” Fuller says. If saving money is a challenge, you may find it helpful to contribute to your down payment or closing costs as part of your monthly rent payment.

Other advantages include:

• You might get lucky and earn instant equity if your home appreciates above the agreed-upon purchase price.

• Building good credit takes time. If you make financially sound moves, you can improve your credit, and hopefully obtain a mortgage with better interest rates.

• You’ll avoid having to move again — and all the stress and money that goes along with a move.

• You get a chance to test-drive your new house and neighborhood.

• By pursuing a less common option, you can avoid heavy market competition.

Cons

When it comes to rent-to-own arrangements, Dunn, whose career includes 16 years as a legal aid attorney, is wary. “I generally don’t think it’s a good idea,” he says.

He cautions that these arrangements can be predatory, targeting low-income renters and minorities. “It’s really a transaction form that originated as a means of exploiting people of color that couldn’t get access to the types of mainstream financing that’s available to whites, and by and large, that’s what it still is,” he says.

You may be required to maintain the property and make repairs, an extra responsibility and expense many renters want to avoid. Worse, the property might be in bad shape, with the landlord using a rent-to-own setup as a way to avoid having to fix it up themselves, Dunn says.

Other drawbacks may include:

• Your monthly rent could be more than you would pay for a rental.

• If you pay a nonrefundable option fee, you could be out several thousand dollars without even owning a house.

• You expose yourself to market risk if the house doesn’t appreciate as expected.

• Maybe you’ve made 23 on-time rent payments. But if you’re late on rent payment No. 24, it could put the whole deal in jeopardy.

• Should you decide not to purchase the house after all, you risk losing what could be a significant amount of money.

• A rent-to-own situation gives you more time to get your credit and finances in order to qualify for a mortgage. But, if at the end of the term you still don’t qualify, then what?

• Sometimes the unexpected can happen. The house could be foreclosed on if the owner is not making mortgage payments, for example, which puts your arrangement in jeopardy.

Cost example for a rent-to-own agreement

Let’s take a look at a rent-to-own cost example that can give you a better idea of what to expect.

Let’s say you enter a two-year rent-to-own agreement. The option fee is 4% of the home’s $200,000 purchase price, or $8,000, which you’ll pay upfront.

Your monthly rent is set at $1,600, with 20% of each payment ($320 per month) allocated to an escrow account throughout your two-year lease. When it’s time to buy, you’ll subtract the $8,000 option fee and $7,680 in rent credits ($320 over 24 months), lowering the effective purchase price by $15,680, to $184,320.

At that point, you can finance the remaining amount with a mortgage, just like a traditional homebuyer.

Is a rent-to-own arrangement the right move for me?

There’s more than one way to become a homeowner. For certain life situations, a rent-to-own arrangement might make the most sense.

You need time to improve your credit

Most buyers require a mortgage to become homeowners. But if you have poor credit, that can be a significant barrier to getting a mortgage with a solid interest rate.

Renting a home, even just for a year or two, gives you the opportunity to strengthen your credit and qualify for a mortgage.

You’re struggling to save for a down payment

It can be challenging to save up for a down payment. By renting to own, you give yourself more time to build up your bank account. Plus, part of your monthly rent payment may be directed toward your eventual purchase.

You’re working on reducing your debt to buy a home

Lenders might balk at providing a mortgage loan if your debt-to-income ratio (your monthly minimum debt payments divided by your monthly gross income) is too high. While you rent, you can focus on paying down your debt.

You plan to stay in the home for a while

If you found a home and location that will fit your needs for several years to come, a rent-to-own arrangement could pay off for you. Plus, you’ll have peace of mind knowing you won’t have to move.

Miller, who has more than three decades of experience practicing real estate law, has another point of view. Certain rent-to-own arrangements could work out if you’re new to an area and like the house but need some time to decide if you like the neighborhood.

“You tie up the property, but at the same time, you’re not tied up to it,” Miller says.

How do you find a rent-to-own home?

Let’s say you’ve decided to move forward with a rent-to-own approach. Now you need to find the right house.

Fair warning: This could be challenging. “The rent-to-own properties are not well organized,” Fuller says. While prospective buyers can visit plenty of online sites to browse houses for sale, and prospective renters can do the same for rentals, there are not many websites that list rent-to-own opportunities, he says.

Your best bet is to follow these tips.

Work with an experienced agent

An agent who has experience with rent-to-own transactions can be your best advocate through this complex process. Not only can they provide you with real estate knowledge and help you locate opportunities, but they can also help you to understand the terms and conditions that often accompany these types of agreements.

Most of his clients set out looking for a property to rent, Fuller says, then decide they’d like to purchase the property they found once they’ve rebuilt their credit or saved up for a down payment. In his experience, most landlords are receptive to an option agreement.

“When we find the right property, and the right tenant, and the right landlord, a lease-option becomes very possible and can be a win-win for all properties,” Fuller says.

Explore alternate options

Some companies offer rent-to-own programs, an option you can consider to reduce risks like having the homeowner go into foreclosure, or decide not to sell to the tenant at the end of the term. In this scenario, the company purchases the home and leases it to you, as the buyer. Once you’re ready to purchase, you purchase directly from the company.

One example of this type of program is Home Partners of America. Home Partners offers one-year rental leases that can be renewed for up to five years. Renters sign a “right to purchase” agreement, which sets a predetermined price should they decide to purchase the house from Home Partners.

Other programs are available through these rent-to-own platforms:

• Divvy
• Landis
• Dream America
• Verbhouse
• Home Partners of America
• Dream America

Approach a seller who’s not having luck with the market

Maybe you or your agent have noticed a house that’s been on the market for a while. Why not ask if the seller is interested in a rent-to-own arrangement? For the seller, the benefit is a monthly income stream. Your agent can approach the seller and make the suggestion.

11 top tips for buyers considering rent-to-own

1. Think about where you are in life

Are you planning on staying in the area a long time? Is this property going to fit your family’s needs years from now? Avoid “buyer’s remorse” by asking these questions up front, Miller says.

2. Get an inspection and appraisal before signing your agreement

You don’t want to end up with a house that’s going to saddle you with endless repairs, or that will be worth less than your purchase price. Be sure to do your homework.

3. Research the property — including its title — before signing

Repeat this mantra to yourself: no surprises. You want to do as much research as possible before you sign an agreement.

4. Research the seller/landlord, too

Does the seller really own the place? Make sure you are dealing with a trustworthy person. Miller warns: “If the landlord starts getting landlord’s remorse, they will do everything they possibly can to get out of that agreement.”

5. Consult with a lender before entering the deal

Talk to a couple of lending institutions before you sign anything. If your goal is to qualify for a mortgage in two years, ask what financial steps you need to take to achieve that goal. You can also look into getting pre-approved so you know exactly what you’ll be able to afford.

6. Watch out for scams and shady dealings

Unfortunately, the rent-to-own landscape has its share of scam artists.

7. Double and triple check everything

Make that quadruple. You’re about to take a big leap into a financial arrangement that carries significant risk for you as a buyer.

8. Follow the agreement to the letter

Comply with the agreement, especially when it comes to making on-time rent payments. “Make sure that you’re going to be able to comply with the financial obligations under the agreement, because it’s usually the money that does people in,” Miller says.

9. Ask about additional fees

Who will pay property taxes? What about homeowners insurance or homeowners association fees? Make sure you know about any bills that may come to your front door, and that your contract clearly states who will pay for them.

10. Consider using a lawyer

A lawyer can look over your contract with a fine-tooth comb. If you’re not “absolutely positive” about the terms of your agreement, it might be wise to consult with an attorney, Miller says.

11. Use the right agent

Whether you’ve decided a rent-to-own agreement is right for you, or you want to pursue a traditional home purchase, it helps to work with a trusted real estate agent who has the right experience for your situation.

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In the meantime, you’re still paying rent, maybe even more each month than you’d pay for a mortgage payment. But what if a portion of your rent were going toward purchasing your rental home at a later date?

That’s exactly the dream that rent-to-own deals are selling, but what’s the catch with rent-to-own homes?

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Rent-to-own basics: Crediting rent toward a future purchase

Also known as a lease-purchase agreement, a rent-to-own contract is an agreement between the tenant and the homeowner stipulating that a portion of the monthly rent is credited toward the future purchase of the property.

Then, when the lease ends — typically within 1 to 5 years — you’ve saved up a credit with the homeowner that effectively serves as your down payment.

Sounds ideal, right?

A rent-to-own deal means you can start paying toward a home purchase even if you can’t technically qualify for a mortgage yet.

“Most people considering a rent-to-own purchase either don’t have a high enough income or good enough credit to buy a house right now,” says experienced Washington state agent Hao Dang, who’s sold over 76% more single family properties in the Seattle area than the average agent.

But renting-to-own isn’t quite so cut-and-dried. There may be additional fees paid to the seller that will not count toward either your rent or your down payment, and you could also be on the hook for maintenance and repairs from the day you move in — but we’ll get into more of all that shortly.

Or, maybe the idea sounds so far-fetched you wonder if rent-to-own homes are even real in the first place — totally fair!

But renting-to-own is a real and valid path to homeownership, so we talked to five people who’ve done it — either from the buying or selling side — to learn more. This includes perspective from Margaret Labus, a real estate agent in the Lake Geneva, Wisconsin, area, who has 20 years of industry experience.

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Before we get into the stories, let’s start with a brief primer on the business of renting-to-own (RTO).

RTO 101: An introduction to rent-to-own homes

As we’ve already introduced, yes, rent-to-own homes are real. It’s a perfectly legal way to buy or sell a house — and creates a unique scenario that requires extra patience and understanding from both sides.

“It’s not terribly common to rent-to-own because most of the people who are in the rental situation are those who, for whatever reason, can’t get financing the conventional way through a bank,” explains Labus. “But, it does open some possibilities with the right seller.”

These possibilities can be stipulated in the rent-to-own agreement — which is also sometimes referred to as lease-purchase, or a lease-option agreement.

The main difference is that with a lease-option, a tenant has the — you guessed it — option to buy the home at the end of their lease term. With a rent-to-own or a lease-purchase agreement, however, the tenant has already agreed to buy the home after a specified period.

Renting-to-own isn’t for everyone, and it’s definitely not something you should go into without doing your research. But if you’ve found a home you love and you just need a little more time to get your credit in order or save up a down payment, a rent-to-own agreement could be your literal foot in the door.

The only thing is, the seller generally also has to see a benefit in the agreement; otherwise, they may as well just sell the home outright — but this isn’t always the case.

1. Renting-to-own as an act of goodwill

Though it’s true that most sellers would rather finalize the transaction as quickly as possible once they’ve accepted a purchase offer, not everyone is in a hurry to relocate or collect equity.

“One investor I work with works solely in the rent-to-own arena because they have it as their mission to supply good and fair housing to people who don’t have the means to purchase right now,” says Labus.

Her investor client believes that everyone deserves to live in a place they can be proud of and be treated with dignity.

“With each house purchased by this investor, there’s an express goal to renovate and build out a home nicely, then turn it around and have it available for a tenant to rent-to-own,” Labus explains.

Labus’ investor client maintains around 50 homes in their area and is happy to accommodate a tenant’s request to move to another part of town — effectively transferring their rent-to-own agreement as needed.

“It’s not every investor who works like this, but this person has deep roots in the area, and they’re emotionally committed to the success of our communities.”

2. A lease-purchase on a dream home

Homeowner Jeff Johnson bought his Maryland home through a lease-purchase agreement. The flexibility of this arrangement made possible a purchase he was not yet in a position to otherwise pursue.

“I opted for a lease-purchase agreement because this was my dream home,” says Johnson. “I didn’t have enough finances at the time, and the lease-purchase agreement allowed me to save some money for the down payment.”

Since one caveat of rent-to-own homes is that property values are likely to change during the term of the agreement — which could extend from one to five years — the buyer and seller must determine a sales price that feels fair to both parties.

“The price I agreed to was slightly higher than market value at the time of purchase, and that’s because the lease agreement was for three years,” explains Johnson. “The property value would obviously rise during that time, so it seemed like a fair deal to me.”

In Johnson’s case, both parties successfully upheld their ends of the bargain, and he paid the agreed-upon price at the end of his three-year lease term.

“Rent-to-own seemed like a great option to me because I was in a financial rut. This allowed me to save some cash for a down payment, pay all the bills on time, and improve my credit score — all while living in my dream home that I’d eventually get to buy.”

Johnson admits that there was one unexpected challenge with renting to own, and that was property maintenance.

“I had to take care of the repairs on my own,” he says. “This is usually the landlord’s responsibility, so I was a little surprised when I had to pay for all of the maintenance.”

So it’s no surprise that Johnson’s advice to prospective rent-to-own tenants is to ensure that maintenance and repair requirements are clearly outlined in the contract to avoid unpleasant surprises (or potentially biting off more than you can chew).

3. A rent-to-own with an option to buy

Keith Sant bought his home in Columbus, Georgia, following a five-year rental agreement with an option to purchase.

“While signing, the price we agreed upon was $230,500, and 20% of my rent went toward the down payment,” says Sant.

He was grateful for the opportunity to save money and improve his credit score while living in a house he’d already locked in at a fair purchase price. Five years is a long time in the real estate world, and Sant acknowledges that interest rates did fluctuate while he was renting — but those ups and downs didn’t negatively influence his decision to buy.

“Since the purchase price was decided on the agreement while signing, that didn’t change,” he says.

Sant had been searching for a home for eight months before finding the one he ended up renting to own. And, knowing he could lose money if he chose not to exercise his purchase option, he didn’t take the decision lightly.

“I weighed the pros and cons of renting-to-own from a buyer’s point of view, and eventually, I decided to go with the deal,” Sant explains.

“Rent-to-own can be a good idea for buyers who are unable to qualify for a mortgage — instead of putting up a heavy down payment before moving in, you can build equity in the house over a period of time.”

For anyone considering a rent-to-own home, Sant recommends thoroughly researching the seller.

“Check the credit report of the seller for any red flags. Obtain a title report to see how long the seller has owned the property — the longer they’ve owned the property, the more equity they have.”

Even if you have a few years of renting ahead of you, if you’re potentially going to buy the property, don’t skip your due diligence before signing an agreement. Have a home inspection completed, order a title search, and — we can’t stress this enough — get everything in writing between you and the seller.

Rent-to-own million-dollar homes just might be your ticket to living in a nice house today, with the mortgage coming sometime down the road.

With rent-to-own homes, you can try the home on for size while holding the door open to purchase the home later. As you’re paying your regular monthly rent, you can also set aside extra funds that will go toward your eventual down payment. That gives you more time to work on your credit score and get ready to pay for a mortgage.

Step one: Talk to an expert

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But, buying a million-dollar house comes with a jumbo mortgage, and you could be in big financial trouble if you bite off more than you can chew. Defaulting on your mortgage can tank your credit score, plus you could lose your house.

Why not test the waters and make sure you can afford the home by renting first? Although it’s not common, you can rent-to-own million-dollar homes. It’s a way to get yourself into a really nice home today — not, you know, five years from now. We’ve talked to a luxury home expert and run the numbers to show you just how people make rent-to-own work with costlier homes.

There are many reasons that a prospective homebuyer could be interested in renting to own. Maybe your credit score could use some polishing, you aren’t quite sure where you want to buy, or you still have those pesky student loans to pay off (ahem, all millennials!) and don’t want to get into more debt.

Whatever the reason might be, you’re not alone — but before jumping into rent-to-own with both feet, you should understand the potential risks. After talking with agent expert Armand Lencheck, who works with 74% more single-family homes than the average agent in his area of Chapel Hill, North Carolina, we’ve compiled a list of 13 reasons why rent-to-own can be a bad situation for buyers, and also provided some alternatives to get your foot in the door of your first home.

The reality of rent-to-own

When looking into rent-to-own contracts, the first thing you might notice is that a “standard” rent-to-own contract doesn’t exist. The rent-to-own process varies by state, and these contracts are usually written by legal advisors working with the buyers and homeowners.

In general, a rent-to-own contract usually covers a time period of between 12 and 24 months — this is the time that you will rent the home before actually buying it. The rent-to-buyers will usually pay an “option fee” when they move in, which is typically 1% to 7% of the purchase price. This fee gives you the first “option” to purchase the house; it is typically non-refundable and is a sign of good will that the tenant is seriously interested in buying the property at the end of the contract.

When the time comes to buy, the option fee is usually applied to the down payment. If the buyer decides not to buy the house, then the seller keeps the option fee.

As a potential buyer, you will usually pay market-rate rent plus some agreed-upon additional funds each month that will also go toward your down payment. This additional monthly payment is usually refundable if the buyer backs out, although the rent portion of that fee is not.

The purchase price of the home is usually set in the rent-to-own contract when you move in, not at the time you buy the home, so you typically can’t negotiate the sales price after you have rented for the term of your contract.

On top of all this, unlike a more traditional landlord-tenant scenario, the buyer is usually responsible for maintenance to the home prior to the purchase.

So: Why is rent-to-own bad for buyers?

Let’s discuss some more specific reasons why renting to own can be a bad idea for buyers and what the alternatives might be.

1. Lease purchase vs lease option

All rent-to-own contracts are different depending on the specific situation; some contracts are “lease purchase” rather than “lease option” agreements. A lease purchase agreement means the buyer is obligated to purchase the house instead of reserving the first option to buy it.

Even if you are confident that this is the home for you, and that you should have the money to buy it at the end of the contract, there are always events that could change your mind. What if you get your dream job (and it’s located across the country), or what if you or a member of your family has a health emergency and you have to move? Heck — what if there is a global pandemic and your financial circumstances change!

If you’re totally sold on the idea of rent-to-own, don’t consider lease purchase agreements and insist on a lease option agreement instead — because if the past few years have taught us anything, it’s that you never really know what will happen in a year or two.

2. The purchase price might be inflated when the time comes to buy

Rent-to-own contracts will usually stipulate how much you’re going to pay to buy the house at the beginning of your contract, so the buyer is effectively locked into that purchase price. The buyer and seller will agree on a price at the start of the contract based on what the market is doing then, and they might not get it right!

The price documented in the contract could be much higher than the home’s market value at the time of purchase, which could be a problem when it’s time for a real estate appraiser to come into the picture — a bank won’t loan more money than a house is worth.

Before signing a rent-to-own contract, talk to a market expert (like a real estate agent) to get their opinion about how the market is growing, or shrinking, to land on a price that you think is fair.

3. You’ll still need to repair your credit and accrue some savings

Let’s be honest — there is usually a reason why rent-to-own sounds like an appealing idea, and that is typically because you don’t have your ducks entirely in a row to buy a home today. You might need a higher credit score to get a mortgage, or save a bit more for a down payment.

Renting-to-own isn’t a get-out-of-applying-for-a-mortgage-free card — you’ll need to secure financing later, when you do buy the house, at the end of the contract. This means that you have a fixed amount of time to get your finances in shape if they need a little TLC, and there isn’t any guarantee that you’ll be approved for a mortgage when the time comes to buy.

Instead of getting yourself into a situation that could be financially detrimental, be vigilant about improving your credit score and saving the money you’ll need to buy a home, and wait for the right time. There is no pressure to buy a home immediately (no matter what your dad might say!).

4. You’re paying more than market value in rent

Don’t forget: there’s no rent-to-own without “rent.” Most of what you will be paying every month is just that, rent. The additional amount agreed upon between the buyer and seller in the contract will go toward your down payment — but remember, you are still paying monthly market-rate rent to the seller until you buy, and that money will not go toward your down payment, and won’t be refundable if you back out of the deal.

If you are already struggling financially, paying more than market value in rent every month might not be the best fiscal move. So if you are getting into a rent-to-own agreement, make sure that you’re not spending more than you can afford, and get an opinion from a financial advisor on the amount you are paying in rent and what’s going toward your down payment vis-a-vis your income and savings.

5. You’ll still need to save up for the down payment

The option fee that you pay at the beginning of your contract and the extra money you’re spending on rent every month will put a dent in your down payment — but it’s unlikely to get you a large down payment.

Think of it this way: If you are in a rent-to-own contract for one year, and the house you are buying will cost $200,000, the option fee will be 1% of that purchase price ($2,000). Then, if you are paying $500 in additional rent each month, by the end of the year you’ll have paid an additional $6,000, for a grand total of $8,000 toward your down payment.

That’s 4% of the home’s total purchase price — not bad by any means, but nowhere close to the 20% you’ll need to plunk down on a conventional loan if you want to avoid private mortgage insurance.

You’ll have to cut corners elsewhere and make sure you’re saving up as much as you can to get the mortgage that you want when it comes time to buy. If you are turning to rent-to-own because you are low on funds for your down payment, some viable alternatives might include down payment assistance (grants and loans), asking friends and family for help (double check loan gifting guidelines), or see if you can qualify for a USDA or VA loan (0% down) right now instead of waiting.

6. You probably won’t get all your extra investment back

Remember, there are three payments that you will make toward your home during your rent-to-own contract: the option fee (non-refundable), monthly market-rate rent (non-refundable), and the additional money that you pay per month, which goes toward your down payment (usually refundable).

That said: Beware of additional fees! The seller might stipulate in the contract that they are charging an additional “convenience fee” on top of all the rest for allowing you to rent, and then purchase the home at a later date. The seller has the right to keep your option fee, your monthly rent, and any additional convenience fees — this could mean money you’re spending that isn’t going toward your down payment; you’ll never see it again. Make sure that you’re clear on how much you’re going to get back, the potential situations under which the seller could keep all your money, and then determine whether it’s worth it to you.

7. If you decide not to buy the house, you’ll lose money

If for whatever reason (ahem, a global pandemic!) you decide to back out of the deal, you are almost certain to lose your option fee — and you might even lose the additional money you’re putting toward the down payment, depending on what is written in your contract.

Pretty certain that rent-to-own will be the best solution for you? Look into programs like Divvy, which have a rent-to-own mentality but do give you your money back if you decide to walk away. In many cases, it will make most financial sense for you to wait, save, repair your credit, and buy a house when you and your bank account feel ready.

8. You may be on the hook for repairs

Many rent-to-own contracts stipulate that the renter will handle any repairs to the home from the time you move in. This could include anything from fixing a leaky sink to installing a new roof.

If you’re already stretching to make your rent and additional payments, will you realistically have the funds for maintenance and repairs? Instead, before you sign your contract, talk to the seller about adding a stipulation that you will split costs, or make sure you can really afford to repair and maintain the house before you actually buy it.

Lenchek says: “You need to determine who is responsible for the major maintenance of this house versus the minor maintenance of this house. It has to be specifically agreed upon in the contract, or there will be big arguments later.”

For a glass half full scenario: if you (the buyer) are responsible for the maintenance of the house, then you have complete control over the quality of the repairs and which contractors you can hire. If the house you are planning to buy does need a large repair, like a new roof, it could give peace of mind to the buyer to oversee that construction. That is of course, if you have the savings to make it happen.

9. When mortgage rates are low, waiting can be costly

We’ve said it before and we’ll say it again: You just can’t know for certain what will happen in a year or two. In 2021, mortgage rates are historically low, but in a rent-to-own situation, there is no guarantee what your mortgage rate will be when you apply for one when you’re ready to buy — and when mortgage interest rates rise, your purchasing power decreases proportionally.

See if you can get financing with today’s rates to buy a home. If you have a good amount of money saved, it might be easier than you think to buy a home now instead of waiting in a rent-to-buy contract, and you might qualify for low down payment programs, especially if you are a first-time buyer!

10. If you’re late with one payment, the whole deal could be over

Many rent-to-own contracts stipulate that if the buyer is late on their monthly payments, even once, they no longer have the option to purchase the home, lose their option fee, and potentially also lose the extra rent they’ve been paying.

Before signing your contract, you need to make sure you’re clear on what happens if you are late on one or more rent payments, and exactly when the rent is due every month. Be sure to also note any reasons for eviction listed on your contract.

Lenchek says: “What we have found is that there are a lot of sellers out here in the marketplace who get that non-refundable deposit, and then turn around and look for excuses to evict the buyer from the house. That’s the biggest red flag [in the rent-to-own field] — the sellers of the home are looking for the smallest excuse, the smallest infraction against the lease to use against the buyer to evict them from the house, pocket that substantial part of the down payment and then put the house back on the market to be sold, or, rent it out again under the same terms.”

Before you sign anything, make sure that the lease isn’t just geared to meet the needs of the seller, and that it is fair to you as a renter as well.

11. If the homeowner stops making their payments, you’ll lose the house

A truly horrific rent-to-own scenario is if you are making all your monthly payments on time, but the seller isn’t.

Rent-to-own deals are usually between two private, individual households, and you don’t necessarily have a clear picture into the seller’s finances when you sign the contract. Ideally, they are taking your rent payments and paying their own mortgage with it … but you have little or no guarantee that they will.

Because the house isn’t yours until you actually buy it, if the seller stops making mortgage payments on the house, the bank can foreclose — no matter what kind of deal you made. In this situation, even though the seller would owe you the option fee and other additional payments, it could be very difficult to get your invested money back without going to court and paying legal fees.

In this case, working with a company can be a more sound investment than an individual; in any event, make sure your contract stipulates what the owner’s payment responsibilities are, so that you have some legal grounds to stand on if they take your option fee and rent and take off to Mexico.

12. The house might not be in peak condition

Often, a seller’s reason for starting a rent-to-own deal is because the property has been on the market for a long time without any offers. The owner could be occupying it or renting it to tenants — or it could have been left vacant for some time.

Depending on how well the most recent occupants kept up with it, it might be in great shape, or it might require some fixes. In a rent-to-own scenario, get a home inspection before you sign anything (and definitely before you move in) as you would during a more traditional home purchase. Make sure to ask your home inspector if they recommend any additional specialized inspections for things like pests, radon, or mold.

13. Rent-to-own can be scammy!

Unfortunately, there are a lot of bad deals out there claiming to facilitate rent-to-own purchases! Many states don’t acknowledge rent-to-own as a standard home-buying practice, and there are no standard contracts in this field — rent-to-own is an area flagged by the Federal Trade Commission for a reason!

There are many reasons that rent-to-own contracts can fall through, leaving little protection for the investments of buyers or sellers.

Before getting lured in by the rent-to-own concept, do your research and work with an expert, like an agent or a real estate lawyer, who can help protect your interests, and who has your best financial interest in mind.

If you are dead set on renting-to-own, above all else, remember to advocate for yourself, do your research thoroughly, and hire experts who can point out potential issues you could run into on the road to rent-to-buy.

Header Image Source: (Sergei Golubev / Unsplash)

Buyers with a limited or shaky credit history may face an even more arduous road to the closing table. Even if your monthly income is solid, lenders only have so much leeway when it comes to overlooking high amounts of debt, low credit scores, and patterns of missed or late payments.

Fortunately, creative solutions do exist for motivated homebuyers. In this piece, we’ll take a look at why a rent-to-own arrangement might actually be a viable option for certain types of renters, and we’ll share input from top real estate agents with decades of experience.

What is rent-to-own?

To briefly summarize, a rent-to-own agreement is a situation wherein a homeowner agrees to sell their house (or to offer the option to buy) to a renter after a certain length of time. This period is usually one or two years, but it can vary depending on the renter’s credit history and how close they are to eligibility for mortgage approval.

How does a rent-to-own agreement work?

As with most real estate contracts, specific rent-to-own terms may differ from one party to the next, but common stipulations include:

• The renter will pay a certain amount above and beyond monthly rental fees, which will be held by the seller to later apply towards the purchase down payment.
• The purchase price of the home is determined at the time of entry into the rent-to-own agreement.
• If the renter-slash-hopeful-buyer chooses to have a home inspection performed, this and subsequent repair or allowance requests may need to be carried out at the start of the agreement.
• The renter is often responsible for maintenance and repairs of the property from the date of move-in.
• There may be an additional fee or deposit that the seller keeps, regardless of contract outcome.
• The seller may have the right to keep a portion (or all) of the would-be down payment funds in the event of the renter failing to uphold their end of the agreement.

This may all sound a bit complicated — and rent-to-own agreements certainly can be — but outlining clear terms to which both parties agree to from day one can create a win-win situation for everyone involved.

Why would you want to rent-to-own?

Rent-to-own deals are not for everyone, but they can be a problem-solving option for certain buyers.

If you need to improve your credit…

For hopeful buyers whose credit history may have lenders feeling uncertain, the year or two spent renting your home can offer time to make significant improvements to your credit score.

And since there’s a legally binding paper trail, lenders may be able to take your rent-to-own agreement into consideration during your mortgage application process (assuming that you’ve been timely and paid in full on your rent every month, of course).

If you need to save for a down payment…

For some buyers, income and credit history may be in good shape, but a down payment is missing from the equation. Renting-to-own can offer an opportunity to get into the home you’ve fallen in love with.

Since a portion of your monthly payments will count toward the purchase of the property, rent-to-own can be a great option for renters who struggle to save money on their own.

If you need to reduce your debt…

Just as with improving a credit score, a rent-to-own scenario provides valuable time to help you improve your debt-to-income ratio (DTI). Lenders typically like to see a maximum DTI of 43%, including your mortgage payment, so your time spent renting is a great opportunity to focus on lowering your debts while simultaneously saving for your down payment.

If you know you’ll be in this home for the long haul…

Given the lengthy runway to purchase, rent-to-own is unlikely to be a good option for buyers who are only looking to stick around for a few years. If, however, you know that this home and neighborhood are where you’d like to live for the foreseeable future — factoring in job opportunities, school districts, quality of life, and so on — then the opportunity costs of rent-to-own may be worth your while.

There are ample pros and cons to this type of agreement, but, ideally, at least three of the four above variables should apply to you for a rent-to-own discussion to be on the table.

What to know before signing a rent-to-own agreement

Rent-to-own is sometimes referred to as lease-to-own, and you’ll likely encounter the phrases “lease option” and “lease purchase agreement,” too. The overarching premise is the same in that the tenant usually enters the agreement intending to buy the home, but there’s nuance that makes it important to differentiate between a lease option and a lease purchase agreement.

“Tenants have to understand that deposit money is deposit money, rent money is rent money, and option money is option money,” says Ed Kaminsky, a Los Angeles-based real estate agent with more than 30 years of experience.

Lease option

If you’ve rented before, you know the drill: Before moving in, you pay a security deposit that you’ll get back after move-out, providing that you’ve paid rent on time and you’ve left the home in good condition.

Monthly rent is, well, monthly rent.

Option money, then, is the additional fee you’ll pay — possibly as a flat rate, but more likely as an additional fee above and beyond rent each month — to grant you the option to purchase the house. In short, you’re paying the homeowner to agree not to sell the property to anyone else for the duration of your rental term, at the end of which you can either choose to purchase or move elsewhere.

The option fees you’ve paid will, in most cases, be kept by the seller should you decide not to buy. If you do move forward with the purchase, that money may be applied as a down payment, depending on how your agreement is structured.

Lease purchase

With a lease purchase, you’re committing to buying the house from the get-go. This scenario is perhaps the one that most people associate with the concept of rent-to-own, but if you’re moving forward with this type of agreement, it’s vital to sign on with confidence and know you genuinely want this particular home.

In either case, be absolutely sure that your rent-to-own contract spells out:

• What happens to your option or down payment fees in the event that one or both parties backs out of the agreement
• Who is responsible for the cost of home maintenance during your rental period
• What happens if you are late on rent (there’s a big difference between voiding the entire deal and losing a month’s fees toward down payment)

Seek expert guidance

Again, if this rent-to-own business sounds complicated, it’s not without reason. While most real estate agents do not specialize in working with rent-to-own buyers, if you can find an experienced agent to have on your side, they’ll help to make sure you understand what you’re potentially getting into.

If you can, taking the extra step of having a real estate attorney look over your rent-to-own agreement is always a smart move.

“I have seen more fraud occur with rent-to-own than you can imagine,” cautions Christina Griffin, a top agent of 20 years in Tampa, Florida.

“I’ve seen a lot of people lose a lot of money with a rent-to-own situation.”

Fraudulent rent-to-own incidents can occur when a homeowner chooses to stop paying their mortgage once they have a contract in place, if the house is already in the process of foreclosure at the time of rent-to-own agreement, if they fail to disclose major issues with the property (think structural problems, water damage, asbestos, and so on), if there are years of unpaid property taxes, or any number of other shady circumstances.

“It’s normally the out-of-the-box scenarios where I’ve seen [rent-to-own] work the best and limit fraud,” says Griffin, citing unique commercial properties and homes that are difficult to finance traditionally.

Rent-to-own for mutual benefit

Often, there’s little incentive for a seller to go the rent-to-own route. After all, why take a year or two or more to sell if a capable buyer is ready and willing to close in 30 days?

“I think sellers are considering [rent-to-own] when they’re having a challenge selling their home,” says Kaminsky.

In slow markets (which has not been the case with 2020’s housing market!), or when aiming for a lofty sales price, a homeowner may feel incentivized to consider a rent-to-own agreement. If a buyer comes along who “is not so challenged by the price but is challenged by the timing because they’re just not really prepared,” says Kaminsky, then a rent-to-own deal may be just the ticket to satisfy everyone.

But, as Griffin warned, be mindful when eyeing a house that needs repairs or renovation. Rent-to-own can be an enticing option for sellers who don’t have the cash to bring a dated home up to demanding market standards, and when met with a buyer who may have limited purchasing power, pesky details like home inspections and cost of upkeep are easily overlooked in favor of signing on the dotted line.

A successful rent-to-own transaction will benefit both buyer and seller, yes, but neither party should blatantly take advantage of the other.

How to find a rent-to-own home

Finding a rent-to-own property can be tricky. Most sellers are hoping to be under contract as soon as possible after listing their home for sale, and offering a lease option is unlikely to be top-of-mind even for homeowners with tricky sales conditions.

As ever, a good buyer’s agent can help you find potential rent-to-own homes — or skillfully propose the scenario to an open-minded seller. You can also utilize programs like Home Partners, Divvy, or Verbhouse, which work with buyers to purchase a house on your behalf, or match you with a suitable property already within their network, and then lease it to you with a right to purchase when the option to officially buy becomes a reality.

These types of services can be an especially valuable option in areas where the cost of buying a home is prohibitive, as they offer more flexibility and protection than striking a deal on your own.

“[These services] are a safe way to be able to secure your price and work with a reputable company and not have to worry,” says Griffin. “It’s a safer option because the liability is less.”

Know rent-to-own is an option, but proceed with caution

Homeownership has long been a mainstay of the American dream, and sometimes it takes more than working long hours and skipping $5 lattes to be in a position to buy a house. There’s no shame in needing extra time to build your credit or save up a down payment, and renting-to-own can offer a valuable lifeline, especially if you’ve found a property that is perfect for you and your family.

While you’ll be hard pressed to find a real estate expert who advocates for any variation of a rent-to-own agreement as the most ideal purchasing scenario, take heart in knowing that the opportunity does exist and that, under the right circumstances, it can be a worthwhile pursuit.

If rent-to-own sounds like a path you’d like to further explore, do your research. Like any potential buyer, you should educate yourself on the neighborhood, property values, and your financing options. Start by talking to a lender to gain a full understanding of where you’re at in terms of credit and what steps you’ll need to take to work toward securing a mortgage, and don’t hesitate to reach out to an experienced real estate agent for their local expertise.

But do understand that expert advice may not always be what you’d like to hear.

“Rent-to-own is great if it’s a weird property, or if it’s not financeable, or if it’s some type of unique commercial space, but there’s so much liability,” says Griffin. “With what’s happening in our world with forbearance and foreclosures and unemployment, I would never encourage anybody to rent-to-own unless [the seller] has no payments due and is free and clear on their home.”

Header Image Source: (Jack Prommel / Unsplash)

There are other options out there to help you achieve your goal. You’ve heard of rent-to-own homes, but don’t really know much about how they work. Does a rent-to-own home build credit? The answer isn’t as straightforward as it might seem.

This article will walk you through the possibilities offered by a rent-to-own agreement, as well as provide data and professional insights, to help you decide for yourself whether it’s for you.

An overview of rent-to-own

A rent-to-own agreement involves renting a home for a set period of time with the ultimate end goal of buying the home from the owner/seller. On top of the rent, you often pay an extra fee that is sometimes applied to the purchase price of the house as a down payment when the time comes for you to buy it.

After the predetermined amount of time has passed, you have the option to buy the home. Rent-to-own agreements use two different types of lease agreements: lease-option and lease-purchase. The agreements are similar, but differ on a key point.

Lease-option agreement

A lease-option contract gives you the option to buy the house once the lease expires. If you decide against buying the house, the option expires, and you can walk away free of any obligation. If you’re going to do rent-to-own, this is the lease you want.

However, be aware that you’ll lose any investment you paid into the house. The seller will keep any money paid on top of the monthly rent that was intended for a down payment on the house.

So, the longer you stay in a rent-to-own, the more money you’ll lose if you choose to walk away.

Lease-purchase agreement

Watch out for these types of contracts. In a lease-purchase agreement, you are required to buy the house at the end of the lease.

“Be sure to review everything and know what you’re getting into,” advises Norris Bishop, a top-selling real estate agent in Georgia with more than 17 years of experience. He suggests working with an agent who can review the contract for you.

“I’ve heard of and seen contracts that weren’t fair to the would-be buyer. Without a professional to check over the contract, you could end up signing an agreement that has an overly strict clause. For example, you might overlook a clause where, if you were late on your monthly payment once, you forfeit your deposit.”

The process

Before you sign your rent-to-own agreement, you’ll need to determine when the purchase price of the home is to be decided. In many cases, you’ll want the purchase price locked in before signing the contract. This is especially true in a real estate market where the home might appreciate at a higher value in a couple of years.

Low mortgage rates can help a little to offset rising house prices, but mortgage rates can fluctuate on a weekly basis.

All of that means that if you’re shopping for a rent-to-own home right now, you’ll probably want to opt to lock in the purchase price as soon as you can.

The other option is to add a contract clause where the price won’t be decided upon until the lease expires. You’ll pay the home’s market value at that point.

Either way, it’s a good idea to get the home appraised to ensure you have an appropriate estimate of the home’s value and make it easier on yourself to get approved for a mortgage when the time comes.

“You need an independent, third-party opinion on the worth of a home,” says Dave Smith, owner of AppraisalSmith of Kansas City. He’s been certified and working as an appraiser for over 15 years. “Having an appraisal done safeguards people from overpaying on a house.”

Smith states that some homes appraise for below the estimated value. In fact, around 10% of all homes appraise below the expected home price. He notes that when a home under-appraises, it isn’t always bad, at least for the would-be buyer. It gives you the chance to renegotiate the contract and can save you money if the seller agrees to lower the purchase price.

Once the price is set and you’ve signed your rent-to-own agreement, you generally must pay the seller a nonrefundable, upfront fee. This fee is often referred to as an option fee.

The option fee is what gives you the right to buy the house once the lease ends in one to five years. The amount you pay typically ranges between 2.5% and 7% of the home’s purchase price. A favorable contract will apply some or all of your option fee to the purchase price when the lease ends and you’re ready to buy.

As the name implies, you’ll obviously pay monthly rent to live in the house. However, every contract differs in terms of how much extra you must pay each month, as well as what percentage of that payment goes toward your home purchase.

You’ll want clear terms laid out in the contract showing where the option payment is going. It’s possible for a seller to have you pay an additional $200 each month and only apply $100 of it to your home purchase.

Ideally, you’ll negotiate a contract where most of the extra money you’re paying on top of rent goes into an escrow fund toward buying the house. Once the lease ends, you’ll then be able to secure a mortgage and buy the house.

If you decide to walk away from the agreement, you’ll unfortunately lose both your option fee and the monthly fee you were paying. This can add up to a monumental loss depending on how long you stayed at the house.

What’s the credit advantage of going the rent-to-own path?

Simply put, a rent-to-own home gives you the time you need to build up your credit score.

The higher your credit score is, the better deal you’ll be able to secure on the mortgage loan. Lenders give people with excellent credit scores far better interest rates, which translates to you paying less over the life of the loan.

As a rule you should aim to have a credit score of at least 620. The better your credit score is, the more options you’ll have for the types of loans you can get.

So how do rent-to-own homes build credit?

There are two different ways a rent-to-own agreement helps build your credit before you apply for a mortgage.

First, ask that your rent is reported to the major credit bureaus.

Bishop suggests you add a clause in the contract that requires the owner to report your payments to the credit bureaus.

“Always pay with a check as well. That way, there’s a clear trail and it can be documented.”

The second step involves doing everything in your power to improve your credit score.

Consider establishing multiple lines of credit. If you can, take out a loan or diversify the types of loans you have. For example, if you already have credit cards, look into a car loan if your monthly budget will allow one.

If you have any high-interest debt, you’ll want to focus on paying it down. Having too much debt can affect your chances of qualifying for a loan.

Throughout the course of your rent-to-own agreement, you should strive to build up a savings account. This savings account should be to help cover the closing costs you’ll have to eventually pay.

Most importantly, pay all of your bills on time every month. A single late payment can drop your credit by as much as 90 to 110 points. That’s a steep hole to climb out of!

If you do everything correctly, by the end of your lease agreement, your credit score should be in stellar shape.

The verdict: Does rent-to-own help your credit?

A rent-to-own home doesn’t directly build your credit. It’s the steps you take throughout the term of the lease that will help to boost your credit score.

Bishop says to “stay diligent.” As long as you’re receiving credit for your monthly rent payments, you’re building capital. You have far more stability with a rent-to-own home than with regular renting.

Keep a close eye on your credit score, get credit lines, and pay your bills on time and you’ll get your foot in the door of homeownership by the time the lease ends. If you’ve done what you should throughout the lease, your credit score will be in such excellent shape that you’ll get far better rates on your mortgage interest rate than you would’ve beforehand.

Last, hire an attorney or work with a top real estate agent so that you have a professional who can look over the contract and watch out for your best interests.

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Sounds great to you — but what about from the seller’s perspective? How does rent to own work for a seller, and why would they sell their house this way?

Why would a seller want to rent-to-own a house?

Understanding a seller’s motives can help you figure out whether this particular rent-to-own deal is for you. Sellers can have many reasons for entering into a rent-to-own agreement rather than selling outright.

The market could dictate a rent-to-own sale

The market could be the reason a seller might want to rent-to-own a house. Matthew Le Baron saw this when he was an agent from 2008 through 2011 in the Boise area. “If an owner was underwater and couldn’t sell,” he says, “They rented the home out and gave people the option to purchase. You’ll see more rent-to-own properties in more of a down market, more of a buyer’s market.” For whatever reasons a seller might want or need to move, a rent-to-own deal makes it possible.

Financing options could lead to a rent-to-own sale

If it’s tough for buyers to get financing right now, the seller might have trouble finding someone to buy the house. It’s possible that buyers in the area are experiencing credit issues, or perhaps they don’t have a down payment together. In those circumstances, the seller might choose to do a rent-to-own.

In Le Baron’s opinion, “People that are going down this path have limited credit or a limited down payment but still want to technically own their home.” If a seller lives in a city going through an economic downturn, which has led to less-qualified buyers — but the seller still needs to move — a rent-to-own helps both them and a buyer.

House or property issues

In other cases, the house or the property is the issue. Kelly Springer, a partner at the firm Willenbring, Dahl, Wocken, & Zimmermann, has handled many contract-for-deed transactions. She says that the most common reason she sees sellers choosing to rent-to-own is for “farm real estate or family transfers. Farms, as a business, run in the red a lot. With new underwriting requirements, post the last recession, the bank can’t finance it.”

An unusual property that has no true comparables in the neighborhood or a residence that’s also a business could prevent a buyer from obtaining financing. If you’re confident that the farm or business would show a profit in a few years and you could buy it outright then, a rent-to-own might make sense.

An older home

Maybe the seller knows that their home can’t compete with other homes in the area on the open market. If those homes have been updated, but still aren’t selling quickly, the seller might worry that listing their home without upgrades would be pointless. An elderly seller might not want to make repairs if they’re retiring and downsizing their house; another seller might not have the money.

While you might think you’d get a deal for a home that hasn’t been updated and is a rent-to-own, that isn’t always the case. If you have poor credit, you represent a greater risk to the seller; if you miss your monthly rent payments, they could struggle to pay the mortgage. Even if the home isn’t in as good a condition as others in the area, you could still pay the same price for it.

This is a scenario where a rent-to-own sale works for the seller, but buyers should still perform their due diligence on the property. Springer says that one of the biggest mistakes she sees rent-to-own buyers make is that they’re “not thinking about some of the things you’d normally do as a buyer of normal real estate; they’re not thinking about title work or inspection.” But if you get all the way to financing the house, and there’s an issue with the title, you could lose your deposit. Treat buying a rent-to-own property just like a normal sale and have all inspections and title work done.

Paying too much for a property in the rent-to-own agreement could lead to an inability to finance it in two years. As the buyer, you’re betting on price appreciation, but Le Baron has seen instances where a buyer agreed to a purchase price of $100,000, the market dropped during the rent-to-own period, and the buyer couldn’t get an appraisal for $100,000 when it came time to get a mortgage and buy the house.

Seller wants regular income

Some sellers would prefer to establish a steady stream of monthly income for a time. A retiree could view a monthly revenue stream in the form of rent as a more attractive option than a lump sum payment. For tax reasons, collecting a balloon sum later could help them save money or better plan for their retirement.

How does rent to own work for a seller?

Sellers still have to find a buyer and agree on terms. While they’ll likely have to pay legal fees, they could avoid a real estate agent’s commission if it’s a transaction between family members. Typically, the final contract needs to address the home’s final price, monthly payments, and what will happen during the contract’s term.

Types of rent-to-own agreements

There are two common forms of a rent-to-own agreement; a lease option or a lease-purchase agreement.

A lease option combines a traditional rental lease with the option to purchase the home later. Your option fee could be 1% to 2% of the home’s eventual purchase price. It only locks in the price, and you’ll likely have to pay a down payment on top of the option fee.

Under a lease-purchase agreement, a portion of your rent typically goes toward the down payment. Because of this, you may pay higher than market rent. When a lease-purchase agreement ends, you must buy the property.

Lease options usually work better for buyers because they’re not obligated to buy the property at the end of the contract’s term. If, after living in the house, you’ve decided that you don’t like the neighbors, the price is too high, or the crime rate has gone up, you can walk away.

Pricing a rent-to-own home

When the buyer and seller decide on a price, will it remain static for the contract’s term, or will it increase 5% to 10% to adjust for price growth? There is risk either way; if the price doesn’t increase, the seller could end up losing money if the home gains a lot in value, if it does increase, the buyer could be locked into paying too much for the house.

Buyers with poor credit should not expect to get a bargain on a rent-to-own. Your lower credit score represents a higher risk to the seller. The price and fees they charge you will reflect a desire to hedge their risk.

Option fees and rent-to-own

How much will the seller charge for the option fee? Similar to a down payment, the option fee gives you the right to purchase the house at the contract’s end for the agreed-upon price. This money isn’t refundable, and if you default on the contract’s terms, the owner can keep it.

Payments on rent-to-own contracts

In addition to deciding on a rent payment, your agreement should specify to whom you should pay your rent. “If the owner misses a monthly payment, the property could be foreclosed upon even if the buyer has been making their payments,” warns Le Baron. He typically advises buyers to “make payments to a long-term escrow company” to protect their investment and ensure that the home’s mortgage remains current.

When discussing the rent payment, the seller may want to include a rent premium. A rent premium is the amount you pay above market rent. As a buyer, you want to know if the premium is applied to your down payment. This could be an easy way for you to save up the down payment to finance the home into your own name, particularly if you struggle to maintain regular savings habits.

Insurance, taxes, and repairs

Clarify if the payment wraps in insurance and taxes, or if you’ll be responsible for those, too. If the seller’s lender requires that they put these funds in escrow, your only worry is that they stay current on their mortgage.

If the roof leaks or a pipe breaks, who’s responsible for having it fixed? Since the owner isn’t a true landlord, they could decide that the buyer must take care of all maintenance and repairs. This represents a risk to you, the buyer. If you’re unable to buy the house outright at the contract’s end, any money you spent on repairs or improvements has benefited only the seller.

Late payments on a rent-to-own

Lastly, what happens if the tenant is late on a payment? While a grace period for late payments is rare, if she’s negotiating on behalf of the buyer, Springer tries to get the owner to accept one. She also advises buyers to “try to wrap in a dispute resolution or notice before the owner starts cancellation.”

If a grace period isn’t stipulated in your rent-to-own contract, then a late payment can void the contract entirely, so don’t ignore this clause.

How long does a rent-to-own contract last?

A two-year agreement is standard for a rent-to-own contract. The idea is that, at the contract’s end date, the buyer will have fixed their credit or saved up a high enough down payment enough to qualify for a mortgage, or the house will have gone up enough in value to appraise.

If you can, try to get a contract extension built into the agreement. Perhaps you can add six months to a year onto the term if you pay an additional option fee, preserving your original investment if you’re still unable to get a loan. From the seller’s perspective, they have little to lose if they agree to this clause, but it provides you some additional protection.

Is rent-to-own right for you?

If you don’t have a full down payment, or you’re still repairing your credit score, renting-to-own your residence could be a great way to ease your way into homeownership. You won’t feel like you’re wasting money on rent, and you could fix things up and make it your own.

Be honest with yourself about whether you’ll improve your credit score by the time the balloon payment comes due. If you have doubts, talk to a real estate expert and get professional advice. You are entering into a contract that has financial and legal ramifications — but one which could eventually help you achieve your dream of homeownership.

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