How Does Rent-to-Own Work? Understand the Process, Pros and Cons, and When It’s Right for You

Many people want to own a home, but getting there can be challenging given the need for large down payments, good credit, and competitive real estate markets. However, a growing trend toward rent-to-own agreements gives people the opportunity to own a home in the future, even if their finances aren’t perfect today.

How does rent-to-own work? These contracts allow you to save portions of your rent payments toward a down payment in the future. Keep reading; we’ll explain the two types of rent-to-own contracts, the benefits and drawbacks you need to know, and the answers frequently asked questions about lease-to-own homes.

Table of Contents

What is rent-to-own?

Rent-to-own programs provide a pathway to homeownership by allowing individuals to rent a property with the option—or sometimes the obligation—to buy it later. These agreements are designed to give potential homeowners, particularly those with limited credit or savings, the chance to work toward ownership over time.

Under a rent-to-own agreement, you sign a lease to live in the home for a set period, typically one to three years. During this time, you pay rent, and a portion of that rent may be credited toward the home’s purchase price. You may also need to pay an upfront option fee, which secures your right to purchase the property at the end of the lease term.

You can enter a rent-to-own agreement in a couple of ways:

Individual landlords: Some property owners offer direct rent-to-own options, which may include more flexible terms but less structure than working with a company.
Rent-to-own companies: Companies including Home Partners of America, Landis, and Divvy specialize in rent-to-own arrangements. These companies typically purchase the home you choose (within their approved guidelines) or allow you to choose from an inventory of homes the company has already purchased and rent it to you while providing structured programs to help you prepare for homeownership. Many also offer credit-building tools, financial counseling, and clear purchase terms to smooth the transition to ownership.

Types of rent-to-own agreements

In a recent Motley Fool study, 79% of participants said they’d consider using a rent-to-own agreement as a path to homeownership. Given that the demand for lease-to-own agreements is expected to grow 3.2% through 2031, according to Cognitive Market Research, it’s important for consumers to be aware of the types of rent-to-own agreements to consider.

There two main types of rent-to-own agreements are lease-option agreements and lease-purchase agreements. Attorneys at Koontz Associates explain that many people use these terms interchangeably, but there are several differences you should be aware of before choosing the best one for you.

The biggest difference is whether you’re contractually obligated to purchase the home at the end of your lease period.

Lease-option agreement (no purchase required)

With this option, you sign a rental agreement and an option agreement. Much like it sounds, the option agreement gives you the option to purchase the property.

You’ll need to pay what’s called an “option fee” to the seller (or the rent-to-own company if you’re working with one). This fee can sometimes be credited toward your eventual home purchase. The amount is negotiable, but it’s typically 2.5% to 7% of the property’s purchase price.

The important distinction is that with a lease-option agreement, you are not obligated to buy the property if you change your mind. However, it’s possible you’ll lose nonrefundable fees (such as the option fee) if you decide not to purchase the property.

Lease-purchase agreement (purchase required)

Unlike a lease-option agreement, a lease-purchase agreement includes rental and purchase agreements, meaning you are contractually obligated to purchase the home at the end of your lease. Your contract to buy the house will have specific terms, which can vary between landlords and tenants.

Some of your rent can go toward purchasing the home (depending on your agreement.)

However, if you’re unable to pay your rent, you could get evicted and lose your deposit and any earned equity.
You also don’t have the option to walk away if you change your mind about buying the property.

It’s important to seek the advice of a real estate attorney before signing a lease option or a lease-purchase agreement to ensure you understand the fine print and your responsibilities as a renter.

How does rent-to-own work?

Rent-to-own contracts vary depending on the landlord or company you work with. However, they all contain similar sections, including rental terms, option fees, and purchase price agreements.

Rental terms

Like a typical lease, you will sign a rental agreement with your landlord or rent-to-own company. This should include information about maintenance costs and who is responsible for them while your landlord is still the legal homeowner.

Your rent might be higher than average, but as part of your agreement, your landlord can save a portion of your rent toward a future down payment.

Option fee

With a lease-option agreement, you will pay the option fee. This fee is usually nonrefundable, and its purpose is to secure your option to buy the home in the future at a price you agree on today.

Depending on your agreement, this fee might go toward the price of your home in the future, but you’ll pay it upfront at the beginning of your lease contract.

Tip

Option fees are only required in lease-option agreements, not lease-purchase agreements.

Purchase price agreement

You’ll agree on a purchase price with your landlord or rent-to-own company at the beginning of your lease agreement, which is based on market conditions. You’re entitled to ask for a home appraisal to ensure your home’s market value matches the purchase price. Usually, you lock in the purchase price and agree to pay that, even if the market fluctuates.

Lease period

Your lease can vary, but typically, a lease-to-own agreement lasts one to three years. This gives you enough time to work on improving your credit and applying for financing for your mortgage.

Purchase decision

When you’re ready to purchase the home, notify your landlord or rent-to-own company. Some companies allow you to buy the house before your lease ends. Keep in mind you’ll need to secure financing to purchase the home.

Eligible properties for rent-to-own

There are many types of rent-to-own properties. Availability depends on your location, but securing a rent-to-own agreement for a single-family home or a condo is possible. To find a rent-to-own property, consult an experienced realtor. Leasing companies might also be able to connect you with an owner who is open to this type of agreement.

Rent-to-own options might be more challenging to find during strong market conditions; sellers might elect to sell their home to a buyer rather than consider a rent-to-own option. Again, a local real estate agent can help you find a property and advise you on important steps, such as getting an independent property inspection and appraisal before signing a contract.

If you decide to look for rent-to-own properties yourself, the FTC provides guidance on avoiding rental scams. For example, be wary of advertisements that offer agreements that seem too good to be true or “owners” who ask for application fees via a gift card, wire transfer, or cryptocurrency.

Eligible renters for rent-to-own

According to a new survey from Realtor.com, 75% of Americans still view homeownership as part of the American Dream—but nearly 70% of renters who want to be homeowners feel like they won’t be able to afford it, according to a survey from Today’s Homeowner.

Rent-to-own options can help those who want to be homeowners but aren’t financially ready. Although qualifications vary depending on the landlord, many accept those with less-than-perfect credit. Renters should be prepared to pay rent on time and work to improve their credit over time to qualify for a mortgage.

Pros and cons of lease-to-own

When considering a lease-to-own agreement, keep these benefits and drawbacks in mind.

Pros

Builds equity while renting
Flexible pathway to homeownership for those with credit issues
Locked-in purchase price (in a rising market)

Cons

Higher upfront costs (option fee)
Risk of losing option fee and credits if unable to purchase
Limited property options and potentially higher overall costs

What you need to know about rent-to-own companies

Rent-to-own companies can simplify the process of leasing to own by helping you find eligible homes, providing financial guidance, and structuring agreements that work for aspiring homeowners. These companies generally operate in one of two ways:

They purchase the home you want and lease it back to you.
They provide a list of preapproved properties you can choose from.

Here’s a closer look at how the process typically works:

Prequalification and application: Most companies require prequalification to determine your budget. Some, like Home Partners of America, also require a full application before moving forward.
Choosing a home: Depending on the company, you may choose from preapproved properties or homes on the open market. For example, Divvy provides a curated list of homes that meet its program criteria. Home Partners of America allows you to choose any home within your budget as long as it meets its criteria and is located in an eligible area.
Purchasing the property: After you choose a home, the company buys it. This step ensures you can secure a property even if you can’t yet qualify for a traditional mortgage.
Renting the property: Once the company purchases the home, you rent it while preparing for ownership. Some companies, including Landis, apply a portion of your initial deposit and ongoing rent toward your down payment. You may also be eligbile for financial coaching to get mortgage-ready.

Working with a rent-to-own company differs from traditional agreements with landlords. Companies provide structure, such as prequalification, set savings plans, and financial guidance, making them ideal for those who need extra support.

However, these companies often charge fees, have strict property criteria, and may require higher monthly payments. Make sure to read all the fine print, ask questions if you don’t understand something, and ask a real estate attorney to review your contracts.

That way, when you enter into a rent-to-own agreement, you fully understand your responsibilities and whether or not you’re allowed to walk away from the house if you decide not to buy it.

How to buy a lease-to-own home

If you’re interested in buying a rent-to-own home, here are the steps to take:

1. Research options

Start by exploring whether you’ll work with an individual landlord or a rent-to-own company. If working with a company, you’ll typically need to prequalify to determine your budget and eligibility for their program. For instance, Home Partners of America requires you to submit a full application before entering into an agreement.

If you’re working with an individual landlord, prequalification may not always be required, but it’s still wise to understand your financial position beforehand. A real estate agent with experience in rent-to-own homes can help you evaluate options and avoid scams.

2. Understand the contract

The contract is the most critical part of a rent-to-own agreement. Whether working with a company or individual landlord, clarify:

Are you required to purchase the home at the end of the lease?
How much of your rent will go toward the home purchase?
Are you responsible for maintenance costs during the lease?
What happens to the payments or equity if you decide not to purchase?
These terms can vary, so it’s essential to ask questions and understand the financial or legal consequences of breaking the agreement.

3. Prepare for purchase

During the rental period, focus on improving your credit score, saving for a down payment, and researching mortgage lenders. Some rent-to-own companies, like Landis, may offer financial coaching to help you get mortgage-ready. Even if you’re working with an individual landlord, it’s wise to consult a mortgage lender early to ensure you’ll qualify when it’s time to buy.

4. Finalize the purchase

When you’re ready to purchase the home, you’ll follow the standard homebuying process. This includes securing financing, completing an inspection, appraisal, and closing. An experienced real estate agent is invaluable during this stage to help ensure the process goes smoothly.

Is rent-to-own a good idea?

Signing a rent-to-own agreement can make sense in specific circumstances. Below are scenarios where a rent-to-own option could benefit you and situations where traditional renting would be best.

If…	Consider rent-to-own?
You’re working to improve your credit	Yes
You’re saving for a down payment	Yes
You are committed to homeownership but don’t qualify for a mortgage	Yes
You want to test a neighborhood before committing	Maybe
Market conditions make fixed purchase prices risky	No
You’re uncertain about future financial stability	No
You’re unsure if you’re ready for homeownership	No

As you can see, a rent-to-own agreement is beneficial when you’re committed to improving your credit and becoming a homeowner. For those who aren’t sure they want to live in a certain neighborhood or have varying financial stability, breaking a rent-to-own agreement could cost you in lost fees, equity, and deposits.

These types of agreements can be helpful if you want to be a homeowner but don’t qualify for a traditional mortgage just yet. However, if you haven’t committed to saving for a down payment or improving your credit score, going the traditional renting path and revisiting homeownership later on would be a better financial option.

This arrangement works well for someone who has good credit but cannot attain a mortgage at this time. This could be a newly self-employed individual who needs two years of tax returns to qualify for a mortgage, or a doctor who is finishing residency and doesn’t have the income to qualify for the mortgage yet. The buyer also must know that this is the home they truly want. Otherwise, I advise just waiting until you qualify for a mortgage.

Michael Menninger , CFP®

FAQ

What happens if I can’t buy the home at the end of the lease?

If you’re unable to purchase the home at the end of the lease, the outcome depends on the type of rent-to-own agreement you signed. In a lease-option agreement, you can walk away without further obligations, though you’ll likely lose any option fee and rent credits you’ve paid.

In a lease-purchase agreement, you’re contractually obligated to buy the home, and failing to do so could result in legal or financial penalties. It’s crucial to review your contract and consider your ability to secure financing before entering into a rent-to-own agreement.

Are rent-to-own agreements legal in all 50 states?

Yes, rent-to-own agreements are legal in all 50 states, but the terms and regulations vary by jurisdiction. Some states have stricter rules to protect tenants, such as requiring clear disclosures or limiting penalties for defaulting on the agreement.

It’s essential to familiarize yourself with your state’s laws and, if necessary, consult a real estate attorney to ensure your contract complies with local regulations and safeguards your rights.

How does lease-to-own work with bad credit?

Lease-to-own can be a viable option for individuals with bad credit. These agreements don’t require a traditional mortgage upfront. Instead, they give you time to build or repair your credit while renting the property.

Some lease-to-own companies offer credit counseling or report your rent payments to credit bureaus to help improve your score. However, you’ll still need to qualify for a mortgage by the end of the lease term, so it’s crucial to work on your creditworthiness during the rental period.

Can I negotiate the purchase price in a rent-to-own agreement?

Yes, the purchase price is often negotiable in a rent-to-own agreement, but it’s typically set when the lease is signed. You and the property owner can agree on a fixed price or a price that adjusts based on market conditions at the end of the lease.

Negotiating a fair purchase price is critical because you don’t want to overpay if the home’s market value declines. Consider hiring a real estate agent or appraiser to ensure the price reflects the property’s true value.

What happens to my rent credits if I choose not to buy the home?

If you decide not to buy the home, you’ll usually forfeit any rent credits you’ve accumulated. These credits are typically applied toward the home’s purchase price, so if you walk away from the deal, they don’t hold any monetary value.

This makes it essential to assess your financial situation and commitment to purchasing the home before entering a rent-to-own agreement. Always review your contract for specific terms regarding rent credits and their potential forfeiture.