How Does Rent-to-Own Work?

Rent-to-own is a housing arrangement where you rent a home with the option or obligation to purchase it later. Unlike standard renting, where you pay for temporary housing with no equity building, rent-to-own gives you the opportunity to own the home you’re living in. Part of your monthly rent may go toward the purchase price, and you lock in a sale price from the start. 

Rent-to-Own vs Traditional Renting

Traditional renting doesn’t offer any path to ownership. You pay rent each month, and when your lease ends, you either renew or move out with no equity built. 

With rent-to-own homes, you have the chance to purchase the property once your lease ends. The agreement typically includes rent credits, which means a portion of your rent is set aside and credited toward your down payment or purchase price when you buy. However, not all rent-to-own agreements include rent credits, so confirm this detail before signing. 

How Does Rent-to-Own Work? 

The rent-to-own process gives you time to prepare for homeownership while living in the property. Here’s how it works: 

Sign a Rent-to-Own Agreement 

You’ll sign a lease agreement that combines a standard lease agreement with an option or obligation to purchase the home. These agreements typically last between one and five years, giving you time to save money, improve your credit, or meet other mortgage requirements. The contract outlines the rent amount, option fee, purchase price, and other terms. 

Pay an Option Fee

The option fee is paid upfront and gives you the right to purchase the home at the end of the lease term. You can expect to pay between 1% and 5% of the home’s purchase price. For example, on a $300,000 home, you might pay $3,000 to $15,000. In most cases, this fee is non-refundable, meaning you’ll lose it if you don’t end up buying the property. 

Make Monthly Rent Payments 

Your monthly rent will typically be higher than the market rate for similar properties. The extra amount above standard rent may be applied to your future purchase price as rent credits. 

For instance, if comparable homes rent for $2,000 per month, but you’re paying $2,400, that extra $400 might be credited toward your future purchase price or down payment. These credits can help with your down payment when it’s time to buy. Use our down payment calculator to see how much you’ll need. 

Lock in the Purchase Price

One significant feature of lease-to-own agreements is that the purchase price is set when you sign the contract. If home values increase during your lease term, you benefit by buying at the lower locked-in price. However, if the housing market declines and values drop, you could end up paying more than the home is worth. 

Buy the Home or Walk Away 

At the end of your lease term, you’ll either exercise your option to purchase or walk away. If you buy, you’ll need to secure a mortgage or have cash to complete the purchase. The rent credits and option fee may reduce the amount you need to finance. If you don’t buy or can’t qualify, you’ll lose the money you paid as the option fee and any rent credits you’ve accumulated. 

Types of Rent-to-Own Agreements 

The two main types of rent-to-own agreements have different requirements and levels of commitment. 

Lease-Option Agreements 

A lease-option agreement means you have the option to buy the home; you’re not required to purchase it. This arrangement offers more flexibility because you can walk away at the end of the lease if homeownership no longer makes sense. You’ll still lose your option fee and rent credits, but you won’t face legal consequences. This is the more common and less risky type of rent-to-own agreement. 

Lease-Purchase Agreements 

With a lease-purchase agreement, you’re legally obligated to buy the home at the end of the lease term. This type of contract carries more risk because backing out could result in legal action from the seller. You might be sued for breach of contract or lose more than just your option fee. Only enter this agreement if you’re confident you’ll be able to and want to buy the property. 

Pros and Cons of Rent-to-Own Homes 

Lease-to-own homes come with both benefits and drawbacks.

Pros of Rent-to-Own

• Time to improve credit: If you can’t qualify for a mortgage based on your current credit score, a rent-to-own agreement gives you time to work on it while living in the home you plan to buy. 
• Build savings for down payment: The rent credits you accumulate can help you build funds for your down payment, making it easier to secure financing. 
• Lock in purchase price: Setting the sale price at the beginning protects you from price increases in a rising market. 
• Try the home before buying: You get to live in the property and experience the neighborhood before committing to purchase. 

Cons

• Higher monthly payments: Rent-to-own arrangements typically cost more each month than standard rentals, which can strain your budget. 
• Risk of losing option fee: If you don’t buy the home for any reason, you lose your upfront option fee. 
• Maintenance responsibilities: Some contracts require you to handle repairs and maintenance even though you don’t yet own the property. 
• Limited legal protections: Rent-to-own agreements often operate in a gray area with fewer safeguards than traditional rentals. 

Who Is Rent-to-Own Best for? 

This arrangement works well for specific situations where traditional homebuying isn’t possible. Rent-to-own is ideal for: 

• Buyers with credit challenges: If your credit score needs improvement but you’re working to build better habits, rent-to-own gives you time to raise your score while securing a home. 
• Self-employed or non-traditional income earners: If you have income that’s hard to document for traditional mortgages, and non-qualified mortgages aren’t an option, rent-to-own lets you work toward homeownership while building the financial documentation lenders require. 
• Buyers relocating or testing a neighborhood: Moving to a new area comes with uncertainty. A lease-to-own arrangement lets you try a community before committing. 
• Buyers preparing for mortgage qualification: If you’re close to qualifying for a mortgage but need more time to save or improve your finances, rent-to-own can bridge that gap. You can evaluate home affordability and decide whether to rent or buy while having multiple avenues available. 

Rent-to-Own Scams and Risks to Avoid 

Not every rent-to-own opportunity is legitimate. Some arrangements are designed to take advantage of buyers. 

Common red flags to watch out for include: 

• Seller doesn’t own the home: Some scammers offer rent-to-own deals on properties they don’t own. They collect your fees and payments, then disappear. 
• Verbal promises not in writing: If important terms aren’t clearly documented in your contract, you have no legal recourse if the seller doesn’t honor them. 
• Unclear rent credits: The contract should specify exactly how much of your rent goes toward the purchase price. 

Luckily, there are ways to protect yourself from rent-to-own scams, such as: 

• Hire a real estate attorney: Have a lawyer review the contract before signing. They can identify problematic terms and ensure your interests are protected. 
• Get a home inspection: Even though you’re not buying yet, pay for a professional inspection to identify major issues with the property. 
• Verify title ownership: Run a title search to confirm the seller actually owns the property and has the right to sell it. 

Understand How Rent-to-Own Works 

Rent-to-own can be a useful path to homeownership if you need time to improve your financial situation. However, these arrangements come with risks and higher costs than standard renting. Make sure you understand every detail of the contract before signing. 

When you’re ready for homeownership, Griffin Funding offers financing options for different situations. Whether you’re exploring first-time home buyer programs or need guidance on your path to homeownership, our team can help. Download the Griffin Gold app to discover loan programs, apply for financing, track your progress, and access helpful tools to reach your homeownership goals. 

Get started online today to explore your mortgage options. 

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 24 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 12 years in business.