Rent-To-Own Homes: How the Process Works

What are rent-to-own homes?

A rent-to-own home is a property you agree to lease first, with the option (or obligation) to buy later. The buyer and seller agree to enter into a rent-to-own contract in which the buyer will pay a set amount of rent for a set period, often one to five years. At the end of this lease period, the seller agrees to sell you the home at the agreed-upon costs. You can either move forward with the purchase or walk away, depending on the contract type.

How rent-to-own homes work

A traditional mortgage involves qualifying for a loan, making a down payment and purchasing the home outright. Rent-to-own shifts that timeline by letting you move in now while working toward buying later. You have more flexibility since you don’t need to meet strict lender requirements or have a large down payment right away.

This differs from traditional renting, where your monthly payments don’t count as a down payment and the property owner can sell or change the rental agreement within their legal rights.

Lease option vs. lease purchase

There are two distinct paths you can take with a rent-to-own contract. One carries significantly more financial and legal risk than the other:

• Lease option: This option is more flexible since it allows buyers to change their minds at the end of the contract. You’re not obligated to purchase the home at the end of the lease option, though you will lose any extra fees you paid toward it.
• Lease purchase: In a lease purchase contract, you could be legally bound to purchase the home at the end of the lease, even if you can’t afford it or fail to secure a mortgage.

» MORE: Renting vs. buying a house

Who is a rent-to-own home best for?

While the rent-to-own option can be pricier than the traditional mortgage path, it also offers a solution for those who don’t meet conventional lenders' requirements.

Steve Nicastro, a former real estate agent and current managing editor for Clever Real Estate, said RTO is a suitable option for:

• Buyers with a clear plan to improve their credit score and qualify for a mortgage within a defined timeline.
• People with steady income who can afford slightly higher monthly payments.
• People who need time to save up for a down payment to buy a home, but can afford the monthly payments of an RTO contract.
• Individuals or families who know they want to stay in a specific house, neighborhood or city long-term.

“RTO homes are a big commitment and can be very expensive, so you should be certain that that's where you want to stay for the long term,” Nicastro said. “You should avoid them if you anticipate moving in a few years or have an uncertain job situation that may require a relocation.”

Pros and cons of rent-to-own agreements

Consider these RTO pros and cons before moving forward:

How to get a rent-to-own house

A rent-to-own agreement is a legally binding contract between the landlord/owner and the tenant/potential buyer. It’s important to be thorough in the process to avoid legal issues later on.

1. Decide if you want to work with a real estate agent

A real estate agent isn’t necessary to buy an RTO home, but they can help you contact and find owners willing to enter into an RTO agreement.

2. Find eligible RTO homes

There are a few real estate sites that specialize in RTO listings, making it easier to find willing owners in your area. RTO listings are also typically posted on social media sites, Zillow and Craigslist. You can also contact property owners or landlords of existing rentals or properties that have been on the market for over six months to inquire about an RTO agreement.

Just keep in mind that it may be harder to find RTO homes, so it may take some time to search for options.

“The RTO homes market is very small compared to traditional listings and rental properties,” Nicastro said. “I believe it makes up less than 5% of the total market.”

3. Negotiate lease terms and purchase option

If the owner agrees to an RTO agreement, discuss and negotiate the lease terms, including the duration of the lease, rent amount and the purchase option price and terms. At this time, you should order an appraisal and an inspection to determine the home's value and identify any potential costly problems.

» MORE: Homebuying checklist

4. Consult an attorney

Consult with a real estate attorney to review the rent-to-own agreement and ensure your interests are protected. Rent-to-own agreements are not all the same and can be full of tricky legalese intended to trap the buyer. A real estate attorney can help protect you and your finances by ensuring you understand exactly what you’re agreeing to.

5. Execute the agreement

Once all parties have agreed upon the terms, sign the rent-to-own agreement and fulfill any upfront fees or down payment requirements. Notarizing these contracts isn't required, but it can be a helpful layer of protection.

Rent-to-own home costs

Rent-to-own costs might appear less expensive upfront, but the whole process can actually cost you more than a traditional mortgage. Typically, tenants are responsible for home maintenance and repairs once they enter into the contract, even though they’re not yet considered the legal owners.

Many agreements include rent credits, but they don’t function like a savings account. Here’s how it typically works:

• Your monthly payment may include a rent premium, so it’s above market rent.
• Only a specified portion of that premium may count toward the purchase.
• Credits may apply toward the down payment or purchase price, depending on the contract.
• Credits are often contingent on on-time payments and may be forfeited if you miss payments or don’t buy the home.

So if rent is $2,000/month and $300 of that is designated as rent credits, you could accumulate $10,800 over three years if all conditions are met.

Other common fees can include:

• Option fee: This is a one-time, nonrefundable fee of 1% to 5% of the home value paid upfront.
• Termination fee: This fee could be 1% to 2% of the home's value if you terminate the contract.
• Inspection and appraisal fee: These fees typically range from $200 to $600, depending on where you live.

Alternatives to rent-to-own homes

If you’re interested in buying a home but unable to qualify for a loan, there are some alternative options you may want to consider.

First-time homebuyer programs

Many states, counties and nonprofits offer first-time homebuyer programs, allowing prospective homebuyers to get assistance with financing, down payments or closing costs. Programs are typically grants or loans and have lenient credit and income requirements.

Government-backed home loans

Government-backed home loans like Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA) loans are designed for low- to moderate-income borrowers. They all have low or no down payment and credit score requirements, making them a great option to consider.

Choosing a cheaper rental temporarily

If your credit history isn’t in good shape, or if you don’t qualify for homebuying assistance or government-backed loans, you’ll likely need to focus on building your credit and savings first.

Renting a cheaper apartment temporarily can save you money and allow you to focus on getting your finances in good shape to qualify for a home loan or even a rent-to-own agreement down the line. If you need help, consider using a credit counseling service.

FAQ

Bottom line

Rent-to-own can bridge the gap between renting and buying, but it’s not a shortcut. The structure, costs and risks vary widely by contract, and even small details (like how rent credits work) can have a big financial impact.

If renting-to-own is right for you, focus less on the idea of “locking in a home” and more on whether the agreement genuinely puts you in a stronger position to qualify for a mortgage when the time comes. It's best to approach RTO agreements with careful consideration and to seek guidance from an experienced real estate agent or attorney.