If you’re like most people, you might dream of owning a home one day — but soaring home prices have made it feel out of reach. Rent-to-own homes offer a creative solution if you want to start the homeownership process, but aren’t quite ready for a traditional mortgage.
A rent-to-own agreement, as the name suggests, allows you to rent a home with the option to buy it at a later date. Rent-to-own deals are complicated, however, and it’s important to understand how they work to make the right decision for your situation.
Rent-to-own agreements usually charge a base monthly rent and an option fee — a one-time, nonrefundable deposit toward the home’s purchase price. Some rent-to-own contracts allow you to apply a portion of your rent toward the purchase price, helping you build savings for your down payment.
There are two main types of rent-to-own contracts: lease-option and lease-purchase.
The rental period before the option to buy varies depending on the contract, but usually ranges from one to five years.
Let’s say you enter into a three-year rent-to-own agreement. The option fee is $6,000. The home’s purchase price is $200,000. Your base rent is $1,200, and $200 of that amount is applied to the home’s purchase price. After three years, you’ll have saved $7,200 ($200 for 36 months). Add in the $6,000 option fee, and you have $13,200. You can then apply for a regular mortgage to buy the home.
See more tips on how to save for a house.
Path to homeownership: Rent-to-own offers a path to homeownership for people who need time to get their finances in order before qualifying for a standard mortgage.
Opportunity to “test drive” a home and neighborhood: Living in a rent-to-own home allows you to “try before you buy” to see if the home and neighborhood are the right fit for you.
Helps you save for a down payment: Since a portion of your monthly rent payment may go toward the home’s purchase price, it can help you build down payment savings over time.
Read our study on whether renting or owning is cheaper in the top 50 metro areas.
Higher costs: You may pay an above-market rate to live in a rent-to-own home, since your monthly payment usually includes the base rent and a portion of the purchase price.
Complex terms: Rent-to-own contracts are complicated, and terms can vary depending on the program or landlord you’re working with. It’s crucial to read and understand the fine print before signing.
You may lose money if you decide not to buy: Depending on your contract terms, you may lose some or all of the money you paid toward the purchase price if you decide not to buy the home when your lease ends.
Not sure what the process is to buy a home? Read about how to apply for a mortgage.
Though not as widespread as buying a home the traditional way, rent-to-own options are out there. Here are some ways to find rent-to-own homes:
Learn about how to negotiate a home price and why you should.
One of the most important parts of the rent-to-own process is reviewing the contract terms and asking the right questions. Here are examples of questions to ask before signing on the dotted line:
→ Am I signing a “lease-purchase” or “lease-option” contract?
→ Which fees will I pay as part of our agreement?
→ How much of my monthly rent payment goes toward the home’s purchase price?
→ Who is responsible for covering home repairs and maintenance?
→ What happens if I miss a rent payment?
→ What happens if I decide I don’t want to buy the home?
→ What happens if I’m unable to qualify for a mortgage to buy the home?
1. Read the contract terms thoroughly Review the fine print of your rent-to-own contract and ask questions about any terms you don’t understand to save you headaches down the road.
2. Speak with a real estate lawyer Having a real estate attorney review your rent-to-own agreement and provide guidance can help give you peace of mind before making any commitments.
3. Find out who’s responsible for maintenance costs To avoid surprises, confirm whether you or the landlord will be responsible for a leaky roof, broken appliances or other repairs.
4. Avoid scams Watch out for rent-to-own scams by taking steps to confirm the ownership and property tax status of the home, especially if you’re dealing with a private seller.
5. Invest in a home appraisal and inspection It’s a good idea to get a home inspection and appraisal — after all, the home might be yours one day. An appraisal ensures that you pay a fair purchase price, while an inspection uncovers any potential problems with the home.
FHA loans and VA loans are both federally insured mortgage programs that tend to have less strict requirements than conventional mortgages. They both usually accept lower credit scores and require smaller down payments, helping to make homeownership more accessible.
See current FHA loan rates and VA loan rates to compare top lenders today.
Check with your state to see if you’re eligible for down payment assistance, like loans or grants. Down payment assistance programs are typically reserved for first-time homebuyers, though eligibility rules vary by state.
It might feel tempting to dive into homeownership right away — but sometimes, waiting can pay off in the long run. Prioritizing debt reduction, credit repair and savings will increase your financial preparedness, helping you secure more favorable mortgage rates and terms in the future.
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