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What Are Rent-To-Own Homes And How Do They Work?

Kaitlin Davis9-Minute Read
UPDATED: July 07, 2023

In a competitive real estate market, securing your dream home can prove difficult. Generally, in order to obtain a mortgage, buyers need at least 3% of a home’s price to put down, finances to cover closing costs, a credit score of at least 580 and a stable income. Due to these requirements, many potential home buyers are considering alternative methods of homeownership, like rent-to-own homes.

In this guide, we’ll discuss what rent-to-own is, how it works, the pros and cons, and how to find these properties and decide if it’s the right choice for you.

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What Does Rent-To-Own Mean?

Rent to own, also known as lease option or lease purchase, is a housing arrangement that allows potential buyers to rent a property with the option to buy it later. It is a legally binding agreement often used among individuals who are having trouble getting a mortgage. It is important to note that rent to own agreements typically last for a predetermined period, during which the renter has the exclusive right to purchase the property.

How Does Rent-To-Own Work?

Rent-to-own houses can be a good way for potential home buyers to lock in a specific home while giving themselves time to prepare for homeownership. Most rent-to-own agreements come with lease terms that range from 1 – 5 years.

These agreements usually include clauses which state that every month, a portion of your rent payments will be put toward a future down payment. Not only could this help you put away money for a home, but it also gives you time to improve your credit score as much as possible.

Lease Option Vs. Lease Purchase

There are typically two types of agreements you can sign to with rent-to-own homes: lease option or lease purchase. With a lease-option contract, you have the exclusive right to purchase the home but can back out after the rental period has expired. With a lease-purchase agreement, you’re legally obligated to buy the house once the rental period has ended.

How To Rent-To-Own A House: 6 Steps

If you’re interested in committing to a rent-to-own agreement, here are the steps you should take:

1. Find A Rent-To-Own Property

The first step in securing a rent-to-own property is finding a home where the seller is interested in committing to this kind of contract. Doing so could prove difficult, especially in a seller’s market, but it’s not impossible. For best results, you should connect with a trusted real estate agent who can help you locate interested sellers. If you’re interested in learning more about finding rent-to-own-properties, keep reading – we’ll get there shortly.

2. Determine The Home’s Purchase Price

Once you've found a rent-to-own property, it’s important to determine the purchase price of the home. This can be done by conducting a thorough market analysis using the Rocket HomesSM Housing Market Report tool, and considering factors such as the property's condition, location and recent comparable sales in the area. Again, it is crucial that you consult with a real estate agent or an appraiser to ensure that you are making an informed decision and negotiating a fair purchase price.

3. Decide Who Performs Home Maintenance

Once you find a willing seller and look at the home’s purchase price, the next step is to negotiate contract terms. A commonly overlooked point is discussing who will be responsible for home maintenance during the rental period. Before you sign anything, it is important to clearly outline the responsibilities of both the homeowner and the renter in the contract. This includes addressing repairs, maintenance costs and any potential improvements to the property. Having these details in writing will help avoid any misunderstandings or disputes later down the line.

4. Enter A Rent-To-Own Agreement

Once you’ve found a seller, did your research and negotiated your terms, it’s time to enter a rent-to-own agreement. Again, this agreement should clearly outline the terms and conditions of the rental period, the purchase price, the option fee and any additional provisions that both parties agree upon. It is crucial to have a lawyer review the agreement to ensure that your rights and obligations are protected. Remember, once this agreement is signed by both parties, you are legally obligated to abide by any stipulations outlined in the contract. This means that if you signed a lease-purchase contract, you cannot opt out at this point.

5. Pay Rent Toward The Home Purchase

Now that the place is yours, make sure to keep up on your monthly rental payments. Remember, one of the advantages of a rent to own arrangement is the ability to accumulate rent credits that can be applied towards the purchase of the property. This will help you build equity and reduce the amount needed for a down payment when it comes time to exercise your option to buy.

6. Purchase The Home

When the rental term ends, you can start the process of purchasing the house. This typically occurs at the end of the rental period, as specified in the rent-to-own agreement. Hopefully, you’ve had enough time to secure down payment and closing costs, build your credit and shop for mortgage lenders. Save yourself the hassle and don’t wait until the last minute to start searching for financing options. It is crucial to have your finances in order and work with a lender to ensure a smooth transition.

Pros And Cons Of Rent-To-Own Homes For Buyers

Your financial situation and goals will determine whether a rent-to-own agreement is the best choice. Here are some of the biggest benefits of renting-to-own homes.

Pros For Buyers

You’ll Have Time To Put Your Financial House In Order – Rent-to-own agreements give you time to get your finances in order, so you’re ready to become a homeowner. When you sign a rent-to-own agreement, you have a hard deadline when you know you’ll be buying the home. You can use that time to save money, build credit and qualify for first-time home buyer assistance programs.

You’ll Be Completely Familiar With The Home – As a home buyer, it’s normal to be concerned about the state of the home you’re buying and any hidden problems. Having the opportunity to live in the house beforehand gives you time to get used to the home, so you know what you’re getting into.

Your Landlord Will Have To Pay For Needed Repairs – Specific terms about repairs will be outlined in the agreement, but in most cases, the landlord is responsible for the repairs during the leasing period. Potential landlords should always consult state and local laws to understand their obligations.

Cons For Buyers

You’ll Still Need To Apply For A Mortgage – Even though you’ll start out as a renter, you’ll need to apply for a mortgage to fulfill the rent-to-own agreement. If you take out a conventional mortgage loan, you’ll need a minimum credit score of 620 and a debt-to-income (DTI) ratio of 50% or less. These guidelines are more flexible for government-backed loans like FHA loans and VA loans.

You Won’t Get Your Upfront Fee Back If You Don’t Buy – The upfront fee is nonrefundable because tenants pay it to give them the peace of mind and luxury of time while completing the home purchase. That means you’ll lose this money if you back out on buying the home.

You May End Up Paying Too Much For The Home – When you agree to a purchase price upfront, there’s always the chance you’ll end up paying too much for the home. Both the buyer and the seller are assuming the risk that home prices will be higher or lower than the agreed-upon purchase price.

Pros And Cons Of Rent-To-Own Homes For Sellers

Rent-to-own agreements come with their own set of benefits and challenges for sellers. Here are the biggest pros and cons to consider.

Pros For Sellers

You’ll Make The Home More Attractive During Buyer’s Markets – In a buyer’s market, there are more homes available than there are interested buyers. That means you won’t be able to attract the same types of offers you would in a seller’s market. In a buyer’s market, a seller desperate to sell a home may have to be open to rent-to-own deals to attract a prospective buyer.

You’ll Receive Additional Income – Since the buyer will be leasing the home for a period of time, sellers will receive an additional source of income. The money received from rent can alleviate some of the financial burden of being unable to sell the home.

You’ll Give Your Tenant A Stake In Maintaining The Home ­– Since the buyer is agreeing to buy the property at the end of their lease, they have a vested interest in the upkeep of the home. That means they’ll likely put more care and effort into maintaining the home than the average renter.

Cons For Sellers

You Could Lose Out On Home Value Appreciation – Due to the market risk, sellers who enter into rent-to-own agreements run the risk that their home appreciates above the asking price during the lease period.

You Are Assuming A Legal Obligation – Rent-to-own agreements create legally binding obligations on both parties. It’s a good idea to talk to an attorney about how the agreement should be structured and to ensure you understand all of the provisions.

You Can’t Be Certain The Buyer’s Mortgage Will Be Approved – After all that effort, a rent-to-own agreement can still fall through if the tenant can’t qualify for a mortgage at the end of the lease period. And appraisal problems could arise if the appraised value is less than the purchase price outlined in the agreement.

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How To Find Rent-To-Own Homes

Across the country, the housing market is slowly starting to cool off, but we’re still operating in a seller’s market. So, it can be challenging to find rent-to-own opportunities, but it’s not impossible. Here are some tips you can follow:

1. Find A Local Real Estate Agent

As stated before, a trusted real estate agent who specializes in this type of home purchase may be able to help you find a rent-to-own property. If you are unable to find a listing you’re fond of, reach out to a professional in your area. Due to their accreditations, they may have access to listings that are not available to the general public.

2. Review Online Rental Or Sale Listings

The internet is a powerful tool, so consider using it to browse options. You may be able to find online listings for rent-to-own homes, but due to the current low inventory environment, these listings are sparse. Remember to be careful to avoid being scammed. Never send money to anyone you’ve never met, always research a listing prior to agreeing to meet with a seller and only search for homes on viable, safe sites. Trust your gut. If it doesn’t feel right, it probably isn’t.

3. Contact A Brokerage

If you haven’t had much luck with the first two options, consider reaching out to a real estate broker instead.  

4. Wait For A Buyer’s Market 

Depending on your area, you might realize it’s worth waiting for the real estate market to enter a buyer’s market before settling. In a buyer’s market, there are more homes available than there are interested buyers. That means you will be able to attract better deals and have more options to choose from, especially if a seller is desperate to close.

Is A Rent-To-Own Home Right For You?

Deciding whether a rent-to-own home is the right choice for you depends on various factors, including your financial situation, long-term goals and personal preferences. No two situations are the same, so crunch the numbers and take a look at your current situation before you sign any agreement. If you’re still unsure, it’s best to consult with a financial advisor or a real estate professional to get a personalized evaluation of your options.

FAQs On Rent-To-Own Homes

If you still have more questions about rent-to-own agreements, the following FAQs may help.

What’s the difference between renting-to-own and taking out a mortgage?

Rent-to-own agreements allow a tenant to live in the home while preparing to qualify for the home purchase. They do this by building or improving their credit, lowering their debt-to-income ratio (DTI) or stabilizing their income. Once the lease portion of the rent-to-own is over, the tenant should be ready to qualify for a mortgage and then become a homeowner. 

What is the term length of a typical rent-to-own agreement?

It depends, but generally 1 – 5 years.

Who pays property taxes on a rent-to-own house?

Generally, the seller pays property taxes until the lease period is up. After the buyer secures ownership, they will be responsible for paying taxes, insurance and other miscellaneous fees.

Does renting-to-own a house build credit?

Yes, renting to own can build credit, but only if the landlord agrees to report payments to a credit reporting agency to help the tenant build their credit. Unless you specify upfront that this needs to happen, rent-to-own agreements won’t typically be reported.

Is there a credit score requirement to rent-to-own a house?

It depends on the agreement you make with the seller. There are no formal requirements because a lease-to-own arrangement is a private contract. However, if you plan to qualify for a home loan to complete the purchase, you’ll have to build your credit score up to at least a 580 to secure an FHA loan.

Is it better to rent-to-own or buy a house?

It depends on your situation. You have to consider factors like your lifestyle, income, future goals and general interests to decide if homeownership is right for you. If you’re uncertain, we have a complete renting versus buying guide that you should consider checking out.

The Bottom Line: Rent-To-Own Homes Can Help Tenants Become Homeowners

Rent-to-own agreements can be a good option for borrowers having difficulty qualifying for a mortgage. However, these agreements are not regulated in the United States, so it’s essential to fully understand the contract before signing anything. These agreements come with pros and cons for both buyers and sellers, so be patient, take your time and don’t rush into anything.

If you’re looking to purchase a rent-to-own home, consider working with a Verified Partner Agent who can help you find your dream home. Remember, patience and persistence are key when searching for rent-to-own homes. It may take time to find the perfect property, but the effort will be worthwhile in securing your dream home. Best of luck on your home buying journey, you’ve got this.

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Kaitlin Davis

Kaitlin Davis is a Detroit native who holds a BA in Print and Online Journalism from Wayne State University. When she’s not writing mortgage, personal finance, or homes content, she enjoys getting involved with her community, traveling, photography and reading.